IR3 Question 22 Income and expenditure from residential property

This question applies to owners of residential rental property, including overseas property subject to the
residential property deduction rules in subpart EL of the Income Tax Act 2007.

You are a major shareholder if you either own, control or have rights to acquire at least 10% of shares or voting rights in a close company, or have by other means at least 10% control of a close company.

A company where there are five or fewer shareholders whose total voting interests in the company are greater than 50%.

Most residential rental properties are subject to the residential property deduction rules (also known as the ring-fencing rules). When they apply, your residential rental deductions generally cannot be more than your residential property income.

If your deductions are more than your income, the difference must be carried forward to the next year you earn income from your residential property, including income from properties held on revenue account.

There are two levels of exclusions from the rules.

Any rental income or loss and net income or loss from a taxable disposal is fully excluded from the new rules if the property is:

• the main home
• property subject to the mixed-use asset rules (holiday home rented out part-time)
• certain employee accommodation.

For these types of property, the existing rules apply with the rental income or loss shown at Box 23 and net income or net loss from a taxable disposal shown in Box 25.

Any rental net loss and net loss from a taxable disposal is partially excluded from the new rules if it is for:

• property that will always be taxed on sale, being revenue account property of a person in the business of building, developing or dealing in land
• other revenue account property the person has notified us they want the exclusion to apply to.

For these types of property any rental net loss is shown at Box 23 and taxable disposal net loss shown at Box 25. Net rental income and net income from a taxable disposal plus any depreciation recovered is shown as residential income Box 22A.

Refer to the Rental income - IR264 guide for information on when the rules apply, how to calculate your income, the amount of deductions you can claim for this year, and the amount of any excess deductions that must be carried forward.

The residential property deductions rules also apply if you borrowed money to acquire an interest in certain entities that have significant rental property holdings - a residential land-rich entity - and you have interest expenditure on the borrowed money.

Residential land-rich entity - a close company, partnership or look-through company that holds more than 50% of its assets by value in residential land, directly or indirectly. These entities come under the interposed entities rules as part of the residential property deduction rules.

For more information about the interposed entity rules, see page 60 of the Tax Information Bulletin Vol 31 No.8 September 2019.

Completing Question 22 in your return

Tick the method you have used to calculate your residential property income and deductions.

You can use one of the following methods:

• Portfolio basis - combine income and deductions for all rental properties in the portfolio.
• Individual, property-by-property basis - income and deductions of individual property calculated separately to other property. You need to maintain separate records for each property to choose this option.
• Combination of the property-by-property basis and portfolio basis - choose to apply different methods to different property. Some properties are held in a portfolio and others are held on property-by-property basis.

If you are an owner of a look-through company (LTC) and have attributed residential income or residential rental deductions, you need to use the same method the LTC used to attribute the income and deductions.

You need to calculate and identify the amounts for Boxes 22A to 22F using the method you have chosen for your rental properties. For the portfolio basis, the allowable deductions from all of the properties in your portfolio can be offset against income you earn from all of the properties in the portfolio.

Calculate your rental income and deductions as usual, as shown at Boxes 4 and 14 on the Rental income - IR3R form. You can then enter these figures in the Residential property deductions worksheets - IR1226 to help calculate the figures required to be entered in your return. You can print a copy off our website ird.govt.nz

Write the total residential income in Box 22A. This is the total of the following amounts:

1. 1. all rental income from the portfolio and/or individual property;
   2. all depreciation recovery income for assets disposed of from the portfolio or individual property;
   3. net income from the taxable sale/disposal of a property in your portfolio or individual property; and
   4. all net rental income, depreciation recovery income and net income from the taxable disposal of the property from residential property excluded because it is held on revenue account.

Only include the net income from a disposal once.

If you are a partner in a partnership or owner of a look-through company and have been attributed residential income Box 26G on the IR7P or IR7L, include that here.

Do not include rental losses from properties not covered by the rules in Question 22. Write any net tax losses from disposals of rental properties that are excluded in Box 25B.

Write the total eligible deductions for the year for all ring-fenced residential rental properties in Residential rental deductions Box 22B.

If you are a partner in a partnership or owner of a look-through company and have been attributed residential rental deductions shown in Box 26M on the IR7P or IR7L, include that here.

Do not include purchase costs, capital improvements or costs incurred when disposing of the property here. They are included when calculating the net income for taxable disposals. This is the total before adjusting for excess deductions.

Include the amount of any interest paid on an investment in a land rich entity that relates to the rental activity in Box 22B. Include the amount of interest paid that doesn’t relate to the rental property in Box 24.

Write the total excess deductions brought forward from last year in Box 22C. This Box cannot be completed for the tax year ending 31 March 2020.

Write the total residential rental deductions claimed this year in Box 22D. This is the result of Box 22B plus Box 22C minus the amount of excess deductions for each property and/or property portfolio calculations shown in Box 22F. Include the amount of interest you can claim on an investment in a land rich entity that relates to the rental activity in Box 22D.

The amount cannot exceed total residential income at Box 22A, unless there was a taxable sale/disposal of a rental property.

Combine the net income results (after adjusting for any excess deductions) for each property and/or property portfolio calculations in Box 22E.

Any losses are counted as zero unless the loss is the results of either:

• excess deductions released as the result of the taxable disposal of the rental property or all properties in a portfolio, or
• claimable interest paid on your investment in a residential land-rich entity. Refer to the Rental income - IR264 guide.

The amount in Box 22E should equal Total residential income Box 22A minus Residential rental deductions claimed this year Box 22D.

Write the amount of all excess deductions for the year to be carried forward to next year in Box 22F.

Notes