IR4 Question 19 Income and expenditure from residential property

This question applies to close companies that own residential property, including overseas property that come within the residential property deduction rules in subpart EL of the Income Tax Act 2007.

The residential property deduction rules, and question 19, do not apply to residential land that is owned by companies other than close companies.

Close company - generally a company with five or fewer natural persons whose total voting interests are more than 50%. Associated persons are treated as one person.

Most residential rental properties are subject to the residential property deduction rules (also known as the ring-fencing rules). The rules generally limit the amount of residential deductions you can claim in the year to the total amount
of residential income earned in that year. If the residential property makes a loss it must be carried forward to the next year in which residential income, including income from properties held on revenue account, is earned.

There are two levels of exclusions from the residential 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);
property owned by companies other than close companies;
property owned by government enterprises;
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 21.

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 is shown at Box 21. Net rental income and net income from a taxable disposal plus any depreciation recovered is shown as residential income at
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 company 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 used to calculate your residential property income and deductions.

You can use one of the following:

Portfolio basis – combine the income and deductions for all rental properties in a 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.

The Residential property deductions worksheets – IR1226 can be used to calculate the information required to be shown in your return.

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

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

1. all residential rental income from a portfolio and/or individual property
2. all depreciation recovery income for assets disposed of from a portfolio and/or individual property
3. net income from the taxable sale/disposal of a property in a portfolio and/or individual property, and
4. all net residential rental income, depreciation recovery income and net income from the taxable disposal of 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.

Write the total residential rental deductions for residential rental properties in Box 19B. This is the total deductions for the current year – Box 14 on the Rental income – IR3R if completed.

If you are a partner in a partnership or owner of a lookthrough company and have been attributed residential rental deductions shown in Box 26M on the IR7P or IR7L include that in Box 19B.

If the company has breached the continuity rules, or you’re transferring excess deductions to a wholly owned group member, you’ll need to reduce the current year deductions in Box 19B to reflect the adjustment. The brought forward
and carry forward boxes are calculated by our system when your return is processed. If the deductions are too low, you’ll need to contact us so we can change it when we process your return. Include a note with your return. See Question 27 for
details on the continuity rules.

Include the amount of any interest paid on an investment in a residential land rich entity that relates to the rental activity in Box 19B. Include the amount of interest paid that doesn’t relate to the rental property in Box 20.

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

Add Boxes 19B and 19C for total rental deductions.

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 all properties 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 result of either:

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

Write the total 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 land rich entity in Box 19F.

Notes

For more information read the Rental income – IR264 guide.