A person may elect to apply the residential property loss ring-fencing rules either on a portfolio basis or on a property-by-property basis. Here we discuss and explain how the ring-fencing rules apply under each method.
Unless a taxpayer elects otherwise, the loss ring-fencing rules will apply on a portfolio basis. This means that investors can offset deductions for one residential rental property against income from other residential rental properties — essentially calculating their overall profit or loss across their entire portfolio.
“Residential portfolio” means one or more residential rental properties that a person holds in a portfolio in an income year. It includes any property the person has included in their portfolio at any time during the period they have a residential portfolio, whether or not they still own it.
The period for which a person has a residential portfolio begins at the start of the income year in which the person first acquires a property for the portfolio, and ends on the last day of the income year in which the last of the properties in the portfolio are disposed of.
A person may elect to apply the loss ring-fencing rules on a property-by-property basis for one or more residential properties. However, this approach is stricter than a portfolio approach. It means that each property the election is made for is looked at separately and deductions for one cannot be offset against income from another. This approach would add complexity because losses would need to be tracked separately for each property, thus increasing compliance costs.
A person makes an election to treat a property on a property-by-property basis by taking a tax position on that basis in their return of income for the income year in which the property becomes their residential rental property.
The election remains in effect for income years in which the person continues to take that tax position. However, if the person changes their tax position, the property becomes a property included in a residential portfolio. A transitional rule provides that for residential rental properties held at the start of the 2019/20 income year, the person must make the election in the return of income for that income year.
A person may elect to apply both the rules simultaneously. This means that certain properties can be included in a residential portfolio where the loss ring-fencing rules will apply on a portfolio basis, and certain properties can be treated on a property-by-property basis.
Please note that the above information is only intended as a general guide. Please contact us to discuss your individual circumstances.