You can choose to apply the individual property basis to any single residential rental property.
You cannot use this basis if there's shared income or expenses with other properties. For example, when you have interest on a loan that covers two properties they would be sharing expenses.
How to choose to apply the individual property basis
You make your choice by taking a tax position in your income tax return. It will need to be for the year the property becomes your residential rental property.
You do the same if you owned your residential property before the start of the 2019-20 income year. You choose to apply the individual property basis by taking a tax position in the 2019-20 income tax return.
Working out your residential property deductions on an individual property basis
When you work out your deductions for a property using the individual property basis:
- its allowable deductions and income are separate from those of your other property
- you cannot use its excess deductions against your other income. This includes income from another property or your salary and wages. This is also known as the ring-fencing rules.
- you must carry forward its excess deductions into the next tax year (unless the property is sold and the sale is taxable).
Using the individual property and portfolio basis together
You do not have to choose one basis if you have two or more properties. You can use both. One or more properties could be in the portfolio. You then use the individual property basis for any others.
Talk to your tax advisor to see what is best for you.
Changing the residential rental deduction basis
You may want to use an individual property's deductions against the income from another property. Before you can, you'll need to change the basis for them so they're both in a portfolio. This can be a new portfolio or one you already have. You can then manage deductions for them together that way.
You can move individual property to the portfolio basis at any time. When you do, you cannot use the individual property basis for them again. You’ll need to keep accurate records for all your properties.
Kauri owns three residential rental properties: Properties A, B and C.
He applies the residential property deduction rules on a portfolio basis to properties A and B.
Kauri applies the individual property basis to property C. This is because he associated with a land developer when he acquired property C. Kauri knows if he sells within 10 years there'll be tax on the sale.
In the 2019-20 income year, Kauri's portfolio properties A and B had a combined gross rental income of $50,000. Deductions for them are $45,000. When Kauri makes his deduction he's left with $5,000 of net rental income.
Property C earned gross rental income of $20,000. The deductible expenses for it were $23,000. This leaves him with excess deductions of $3,000.
In his 2019-20 income tax return, Kauri includes the $5,000 of net rental income from portfolio properties A and B.
Kauri cannot use property C's excess deductions against the income from properties A and B. He also cannot use them against any other income, for example salary or wages.
Kauri carries forward property C's excess deductions into the next income year. They then get added to the deductions for property C in that next year.
If Kauri sells property C and the sale is taxable, the net profit or loss for it would be known. Kauri can use property C's excess deductions against the tax on its sale. Any excess deductions left over can be used against any other income Kauri has.