IR3NR Question 19 Income and expenditure from residential property

This question applies to non-residents who are owners of New Zealand residential rental properties that come within the residential property deductions rules in subpart EL of the Income Tax Act 2007.

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 in which you earn income from 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 20 and net income or net loss from a taxable disposal shown in Box 22.

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 20 and taxable disposal net loss shown at Box 22. Net rental income and net income from a taxable disposal plus any depreciation recovered is shown as residential income Box 19A.

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 deduction rules also apply to any non-resident who has borrowed money to acquire an interest in certain entities with significant rental property holdings - a residential land-rich entity - and has 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. They 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 19 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 the 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.

Calculate and identify the amounts for Boxes 19A to 19F using your chosen method.

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 the Inland Revenue website ird.govt.nz

Write the total residential income in Box 19A. This is the total of the following amounts:

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 that is outside the 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 that the rules do not apply to at Question 19.

Include these and any tax losses on disposal of residential properties in Box 22B.

Write the total eligible deductions for all residential rental properties in the Residential rental deductions Box 19B.

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.

Write the total excess deductions brought forward from last year in Box 19C. This box cannot be completed for the tax year ending 31 March 2020.

Calculate the amount of allowable deductions you can claim this year adjusting for excess deductions. Write the total Residential rental deductions claimed this year in Box 19D. This should equal Box 19B plus Box 19C less the amount of excess deductions for each property and/or property portfolio shown in Box 19F.

The amount cannot exceed total residential income at Box 19A, 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 and write the total in Box 19E. Your total Net residential income in Box 19E cannot be a loss, unless the rental property or all the properties in the portfolio have been disposed of as taxable sales.

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 (refer to Disposals of rental properties), or
claimable interest paid on your investment in a residential land-rich entity (refer to the Rental income - IR264 guide).

Write the amount of all excess deductions for the year to be carried forward to next year in Box 19F. This is calculated as Residential rental deductions Box 19B minus Residential rental deductions claimed this year Box 19D. This includes the amount of any excess deductions to be carried forward for interest paid on an investment in a residential land rich entity.

Notes