When you own a rental property, you're likely to have maintenance and administrative costs. You can claim all or some of these costs as a deduction against your rental income. This reduces the tax you pay on the rental income you receive.
You can claim deductions up to the amount of rental income you earn in a year (including income from the sale of a property). This is called 'ring-fencing'. Because rental deductions can now only be claimed against rental income, you can no longer offset excess deductions against other income such as salary or wages.
When you have excess deductions you must carry them forward from year to year and deduct them when your residential property makes income.
Check if the residential property deduction rules apply to you
The residential property deduction rules will apply if you own rental property in the following capacity:
- individual owner
- partner in a partnership
- shareholder in a look-through company
- shareholder in a close company
- trustee of trust.
Property the residential property deduction rules apply to
The residential property deduction rules apply to all your residential land including your overseas residential property.
Property the rules do not apply to
The residential property deduction rules do not apply to:
- your main home (if you have more than one home, this is the home you have the greatest connection with)
- property that comes into the mixed-use asset rules (for example holiday homes)
- property that will be taxed on sale, regardless of when it’s sold (you should let us know if this applies in order for it to be excluded from the residential property deduction rules)
- property used mainly as business premises
- property owned by a company other than a close company
- employee accommodation
- property owned by Government enterprises.
Choosing a basis to work out residential property deductions
To get started, you should choose a basis to work out your deductions. You can use the portfolio basis, the individual property basis, or both options together if you have more than one property. The key difference between the options is with the:
- portfolio basis you can use the deductions for one property against the income from another property in the portfolio
- individual property basis you cannot use the deductions for one property against the income from another property.
We recommend that you talk to a tax professional about which approach is best for you.
Tailored tax codes
If you have a tailored tax code or certificate of exemption for rental losses (which you used to be able to claim against other income), you may have a tax bill at the end of the income year.
If your tailored tax code relates specifically to rental losses, you’ll need to contact us to discuss your situation. To avoid a tax bill you may need to either:
- cancel your current tailored tax code and complete a new Tax code declaration - IR330
- amend your current tailored tax code to a higher rate to cover the reduction already received.