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.
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 residential income, 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 the applicable box 12, 13C or 14C and net income or net loss from a taxable disposal shown in box 11.
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 net rental income and net income from a taxable disposal plus any depreciation recovered is shown as residential income in Box 10A.
All other residential property income is to be included in Box 11.
Any rental net loss is shown at the applicable box 12, 13C or 14C.
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 club or society that 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 10 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.
Calculate and identify the amounts for Boxes 10A to 10F using your chosen method/s.
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 from ird.govt.nz
Write the total residential income in Box 10A. This is the total of:
- all rental income from the portfolio (and/or individual property);
- all depreciation recovery income for assets disposed of from the portfolio (or individual property);
- net income from the taxable sale/disposal of a property in your portfolio (or individual property); and
- 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.
Write the total eligible deductions for residential rental properties in the Residential rental deductions in Box 10B. 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 10C. 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 10D. This should equate to Box 10B plus Box 10C less the amount of excess deductions for each property and/or property portfolio calculations shown in Box 10F.
The amount cannot exceed total residential income at Box 10A, 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 10E. Your total Net residential income in Box 10E 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 portfolio properties.
- 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 10F.
This is calculated as Residential rental deductions Box 10B minus Residential rental deductions claimed this year in Box 10D.
Refer to the Rental income - IR264 guide.