ring-fencing rental propertiesFrom time to time there may be a change in circumstances to a rental property that is classed as a “change in use”. For example, a property may be rented out to tenants for part of the financial year, and upon moving out the owner moves in and uses it as their main home. This effectively changes it from a rental property to an owner-occupied property, and has potential implications for the ring-fencing of rental property losses.

As explained in our previous article “Ring-fencing Of Residential Rental Property Losses”, these rules apply for an income year when you are allowed a deduction for expenditure or loss incurred on one or more residential rental properties. Where the deduction amount is greater than the residential income, the excess is:

  • Suspended as a deduction for that income year; and
  • Carried forward to a later income year when residential income is earned; and
  • Added to the deducted amount for expenditure or loss incurred in that later income year.

The ring-fencing rules don’t apply if more than 50% of the land is used for most of the income year by the owner as their main home. Therefore if a residential rental property changes to become the owner’s main home for most of the income year (i.e. more than six months), then any rental deductions incurred when it was tenanted are not subject to the ring-fencing rules for that year. Any loss for that part year of tenancy can be offset against non-residential income.

When the owner sells the property (regardless of whether it is residential rental property at the time of sale), any unused excess deductions are released if they have taxable income under the land sales provisions as a result of the sale. However, if the property has changed in use from residential rental to a main home, any excess deductions are not released from the ring-fencing rules and will only be released when an eventual sale triggers taxable income. If eventual sale doesn’t trigger taxable income then the excess deductions will continue to be carried forward until there is sufficient residential income.

Please contact us if you would like to discuss this or any aspect of Property Accounting. Whether you have a single rental property or a portfolio of properties, our expertise and experience in rental property accounting can help you to maximise your returns.