Everybody with a residential rental property heaved a sigh of relief when the government abandoned its plan for a capital gains tax – but, instead on 26 June 2019, a new bill passed into law which affects many owners of rental properties.
From the 1st April 2019, owners of residential rental properties will no longer be able to offset their rental losses against other income. This is a very significant change for many rental property owners. Many rental properties make a tax loss caused by mortgage interest and other rental expenses being offset against rental income and this loss was used to offset the other income of the owners.
A rental property being charged out at $400 per week with a mortgage of $500,000 could offset the interest and other expenses:
Rental income $20,800
Mortgage Interest $23,450 (4.69% interest rate)
R & M $800
Rental Loss –$6,950
This loss could then be offset against personal income which if you were paying the top marginal rate would have saved you $2,294 in tax. That was a very substantial tax savings and now it’s gone!
You can no longer offset rental losses against other income. You have a choice how you account for the losses:
Methods for Accounting for Property Losses:
- Portfolio Approach : this is the default method and allows losses from one property in your portfolio to be offset against profits from other properties and you look at your entire portfolio for the tax position. This is the easier option as you do not need to worry about tracking and ensuring costs are correctly allocated between each property.
- Property-by-Property : You must make an election to use this basis either on your tax return or on acquisition of the property. Each property income/expenses needs to be calculated separately and if there is excess deductions then these losses can not be offset against other properties and must be carried forward for utilisation against this property only. You will need to keep detailed records of losses on a property by property basis. This involves more work and good tracking/records need to be kept as claimable costs must solely relate to a property – this can cause compliance burdens and allocation issues.
Making a choice about which option will work best for you is a conversation to have with your accountant as it depends, very much, on your personal circumstances.
It’s important to remember that this only applies to residential rental properties. Main homes, commercial property, short term rentals, farmland, mixed use or dual use are all excluded from the legislation. It doesn’t matter what kind of entity owns the property, they are all covered except large companies (more than 5 shareholders).