The Government has introduced legislation to prevent tax losses from residential rental properties being offset against other income.
That’s right. We have the Brightline Test, which seeks to tax gains on residential rental properties where sold within 5 years. We have the proposed Capital Gains Tax, which has been receiving much media attention. And we also have the Ringfencing of Losses, which seeks to deny the immediate use of tax losses, and preserves them to be offset against future income from residential rentals. Call it a triple whammy.
The legislation was introduced before Christmas, and will probably be passed into law in June 2019. The plan is to backdate it to April 1, 2019. So if you were counting on a tax refund from the March 2020 tax year, it is time to change your expectation.
In the early stages of property ownership, when high levels of debt have been incurred to fund a property acquisition, rental properties usually run at a loss. For many people these losses have been offset against other income they have. The new bill provides that the losses will accumulate, and later in the property ownership cycle, when the property is now turning a profit, the profit can be offset against these losses. It could be argued that the benefits of the loss have simply been deferred to a later date.
If only it was that simple, we could be somewhat relieved. But too many people find that rental property ownership is not for them. And so they sell before the property delivers any profit. At the time of sale the losses cannot be utilised unless the sale has triggered taxable income. This taxable income is only likely to arise where the rental property has been subject to the Brightline test, or is otherwise captured. Otherwise, the losses are lost, unless our budding rental property owners seek to invest in rental property again, where they can roll the losses from the first property against the eventual profits of the second property.
This is where the proposed Capital Gains Tax could be useful, as the losses can then be applied against the Capital Gain. But I would be reluctant to rely on this opportunity yet.
So, what to do. Firstly, review whether your rental residential property is making or losing money, Secondly, if your rental currently loses money, decide whether you can sustain not receiving the tax refund. And if you cannot sustain losing the tax refund, it may be time to consider other options, such as selling up.
There are many different scenarios. To discuss your specific situation, contact us.