You may have transferred excess deductions when there's been a non-taxable sale of:
- individual property
- property in a portfolio.
You're able to transfer excess deductions to any other residential property you have. That property can be using either the portfolio or individual property basis.
Transferred excess deductions are always subject to the residential property deduction rules.
Transferred excess deductions when you have no residential rental property
Sometimes you'll have excess deductions to transfer but no property to transfer them to. If this happens you carry the excess deductions forward from year to year.
You keep carrying them forward until you earn income from a residential rental property in the future. You can then treat them as transferred to that future property.
You need to track transferred excess deductions. You do this up until they're used.
You cannot ever use your excess deductions against other income, such as salary and wages. This is known as the ring-fencing rules.
Selling property with transferred excess deductions
When you sell a property and the sale is taxable you can usually use its excess deductions. You can use them against the sale income and your other income.
The amount of excess deductions you can use is lower if the property has transferred excess deductions. You'll need to lower the amount of excess deductions you can use by the amount you've transferred to the property.
Nozomi has excess deductions and transferred excess deductions
Nozomi owns residential rental property A.
In the 2019-2020 income year Nozomi sells property A.
The sale of property A was not taxable. Nozomi has unused excess deductions of $2,000.
Two years later Nozomi acquires rental property B. She transfers property A's unused excess deductions to property B. These are Nozomi's transferred excess deductions.
In the 2023-2024 income year Nozomi sells property B. The sale is taxable and Nozomi makes a loss on the sale. Nozomi has excess deductions of $5,000 for property B. This includes property A's $2,000 of transferred deductions.
Because the sale of property B was taxable Nozomi can use some of the excess deductions. She cannot use all $5,000 of excess deductions. Nozomi needs to lower the amount by $2,000. This is because she cannot use the $2,000 of transferred deductions from property A.
Nozomi can only use $3,000 of excess deductions against any other income she has. She will have to carry forward the $2,000 of transferred excess deductions from Property A. Nozomi needs to keep doing this from year to year until she earns income from another residential property.