If you thought compulsory insulation, compulsory kitchen and bathroom fans and compulsory fixed heaters were enough, you are going to be disappointed. More than a year ago, the government announced that rental losses were going to be ringfenced. This has now passed into law… not that you would know about it. I have looked everywhere and, unless you are used to reading legislation, or IRD policy (and the website has not yet been updated, even though the ringfence is already law), you wouldn’t know about it. Seriously. We are being kept in the dark.

The Allocation of Deductions for Excess Rental Land Expenditure was passed into law last week and applies to all rental properties with effect from 1st April 2019. Section 51C New Subpart EL deals with this. (Here is the reference if you want to read the legislation)

Here is what is happening. Owners of rental properties will not be able to claim rental losses in the year in which they are incurred. Instead, they will be carried forward (ringfenced) to be offset against future rental profits. You will not lose the rental losses altogether, but you will not be able to offset rental losses against other income,including tax paid salaries.

This is what they are getting at, of course. If you are a landlord, your rental losses cannot now give you a personal tax refund. This rule applies from this tax year -the year to 31 March 2020. Your losses will be carried forward to be offset against future rental profits… for as long as it takes.

While this rule has been in the pipeline since March 2018, it has only just passed into law, presumably last week, when the government was about to go on holiday. I can find nothing about this in the media, who obviously think that it is fair enough to beat landlords with yet another big stick. Nothing new there.

Here is what is really wrong about this legislation.

If you have a small business, on the side to your day job, you can claim any losses against your personal income. So let’s say you have a small digger business, which you operate in your spare time, mainly because you love driving your digger. You can claim all expenses on the digger, including maintenance and depreciation, and if you end up with a loss, as a result of excess expenses, you get a tax refund, no questions asked.

If you own a rental property, however, this is also viewed as a business by IRD… just like the digger business. However, landlords are not allowed to claim depreciation on their buildings, even though it is mostly the land that increases in value. Landlords are required to install loft and underfloor insulation, but the cost is not deductible… sorry, guys, but that is considered to be expenditure of a ‘capital’ nature, even though you are required by the government to do it.

Next year, landlords will be required by the government to fit kitchen and bathroom fans, and fixed heaters and these will also have to be capitalised unless you can get each one done for less than $500. (Don’t do them all at once either, otherwise, the ‘pooling’ rules regarding capital assets will apply.)

Just so you know, digger drivers are not required to install any insulation or extractor fans, but any maintenance they do is tax-deductible, including replacing the rock bucket or buying new tyres.

So landlords, who provide accommodation to people that the government simply cannot house, are beaten with yet another stick, and now are the only group of business owners who are not allowed to claim losses against other income, even though those losses are mostly revenue losses, and so should be subject to normal expenditure rules.

If you are a landlord and are hoping for a personal tax refund next year, be warned. If your property is owned in an LTC, you are still okay. Otherwise, you might want to consider selling up. Even though you are providing a social service, you are not wanted. The government would rather have people on the street than allow you to claim a tax refund. It really is that bad.

Sell up, landlords. At some point, the government is going to realise that subsidising private landlords is the only way to solve the short term housing problem. For those of you making rental profits, increase your rents. There are going to be fewer and fewer rentals available, and your properties are going to be like gold. You can thank this stupid, shortsighted government for giving you an income you would never have dreamed about.