When your deductible rental expenses are more than your rental income you’ll be left with excess deductions.
When you have excess deductions you:
- must carry them forward from year to year and deduct them when your residential property makes income
- generally cannot use them against your other income, such as salary and wages or business income, which would result in a lower tax liability.
The residential property deduction rules (also known as the ring-fencing rules) set out what you can do with your residential property deductions.
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 (also know as the ring-fencing 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
- 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)
- land 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.