Act pledges to remove loss ring-fencing rule to reduce residential property investors’ tax bills by $300m a year

Act proposes restoring the ability of residential property investors to use rental losses against other personal income. That would reverse the loss ring-fencing rules introduced in 2019. Act leader David Seymour says the change would make property investment more attractive and help landlords manage cash flow.

For example, an investor with a $10,000 rental loss could deduct it from a $100,000 salary. The investor would then pay tax on $90,000 instead of $100,000. Under the current approach, that loss is carried forward rather than immediately reducing tax on salary.

Act says the change would apply to existing homes and new builds. Losses already ring-fenced would remain under the existing rules. The proposal is expected to reduce Crown tax revenue, while Seymour argues lower costs for landlords could support repairs and more affordable rental housing.

Loss ring-fencing separates residential rental losses from a person’s other income. The loss cannot immediately reduce taxable salary, wages, or other personal income. Instead, it is held for later use against income from the property when the relevant rules allow it. This limits the immediate tax benefit of making a rental loss.

Suppose a rental property loses $10,000 while its owner earns a salary. The owner cannot simply subtract that loss from salary under the ring-fenced approach. The $10,000 is carried forward. The article says this can force landlords to wait until a property becomes profitable before using the loss.

The rule was introduced in 2019 and remains in force for existing ring-fenced losses. Act would abolish ring-fencing for existing homes and new builds, but those earlier losses would still follow the current rules. Act links the change to cash-flow relief and repairs.

The proposed change would reduce government tax revenue because investors could use residential rental losses to lower the income on which they pay tax. Act estimated the cost to the Crown at $246 million in the first year. That is the immediate annual revenue impact identified in the proposal.

The estimated cost rises to $303 million in the fourth year. In practical terms, the government would collect less tax as more investors claimed deductions against salary or other personal income. A $10,000 rental loss, for instance, could reduce the taxable income of an investor earning a salary.

Act said its estimates were based on Budget 2018 numbers, adjusted for the increase in the size of the economy. The figures show the proposal has a significant fiscal cost. They also frame the policy debate: supporters emphasise cash flow and housing supply, while the government would forgo revenue.

Removing loss ring-fencing would allow a landlord to use a rental loss immediately against other personal income. That could reduce the landlord’s tax bill in the year the loss occurs. It would also leave more cash available when the property itself is losing money, rather than delaying the benefit.

The article gives a $10,000 example. If the investor earns $100,000 in salary, Act’s proposal would allow the loss to reduce taxable income to $90,000. Under current rules, the loss is carried forward. Seymour says delayed deductions can make it harder to fund essential repairs when cash flow is tight.

The benefit would come with a cost to the Crown, estimated at $246 million in the first year and $303 million in the fourth. Act says the change could make rental property more attractive. Critics of the earlier policy argued that such deductions can advantage investors competing for homes.

Negative gearing is the practice of using a rental property’s loss to reduce taxable income from other sources. The loss may arise when rental income does not cover property costs. Before ring-fencing, this could lower the tax paid on salary or other personal income, giving investors an immediate tax benefit.

The article reports that Inland Revenue and Treasury found the practice relatively widespread in New Zealand’s rental market. Forty percent of taxpayers with residential investment property reported rental losses. Their average annual tax benefit was $2000. Those figures show why the issue became important in policy discussions.

The agencies expected negative gearing to continue if no further action was taken. They also noted that the size of losses depended on the housing market. In 2019, the Labour-led Government introduced loss ring-fencing, limiting how residential rental losses could be used. Act now proposes removing that restriction for existing homes and new builds.

The Labour-led Government said loss ring-fencing would level the playing field between property investors and owner-occupiers. Investors could reduce tax on other income by claiming rental losses. Owner-occupiers, by contrast, could not deduct the costs of owning their homes from wages or salaries.

Inland Revenue and Treasury said that without a change, part of an investor’s mortgage-servicing cost could be subsidised by lower tax on other income. That tax advantage could help investors outbid people buying homes to live in. The agencies therefore linked the rule to competition in the housing market, not only to landlord taxation.

The agencies also said negative gearing had become relatively widespread. Forty percent of taxpayers with residential investment property reported rental losses, with an average annual tax benefit of $2000. The 2019 rules limited that advantage by ring-fencing losses. Act argues the rules should instead be restored.

An income-tax deduction subtracts an eligible cost or loss from income before tax is calculated. A larger deduction means less taxable income and usually a smaller tax bill. In this case, the issue is whether a residential rental loss can be deducted from salary or must be kept separate and carried forward.

The article gives a clear example. An investor with a $100,000 salary and a $10,000 rental loss could pay tax on $90,000 under Act’s proposal. That immediate saving can improve cash flow. It may also help cover essential repairs when a property is losing money, rather than waiting for future profits.

The rule can affect housing decisions because the tax saving may help investors bid against owner-occupiers. Inland Revenue and Treasury warned that mortgage costs could effectively be subsidised by lower tax on other income. It also affects revenue: Act estimates the change would cost the Crown $246 million initially, rising to $303 million in year four.