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Income Tax Act 2007

Timing and quantifying rules - Allocation of deductions for excess residential land expenditure

EL 2: Outline of subpart: specific provisions

You could also call this:

“Rules for deducting expenses from residential rental properties”

When you own a residential rental property, sections EL 4 to EL 8 apply to you if you have expenses or losses related to the property that you can deduct. These rules don’t include costs for property you’re planning to sell.

You can use these rules for all your rental properties together or for each property separately. You can even mix it up, using the rules for some properties together and others separately in the same year.

If you have extra expenses under section EL 4, you can use them in later years when you make money from your rentals. Sometimes, you might not have to follow these rules anymore.

There are some properties where the rule in section EL 4 about splitting up deductions doesn’t apply. These include your main home, property you’re planning to sell, property owned by certain people or groups, property covered by subpart DG, and property you provide as housing for employees.

The rules can change a bit for companies. There are special rules about continuing to use past expenses and transferring between companies in the same group. There are also rules about deducting interest when you borrow money to invest in a company that owns a lot of residential land.

If you sell residential land within two years and make money from it under section CB 6A, section EL 20 applies to expenses you can deduct as costs of property you’re planning to sell. This section also talks about what happens with these expenses if you sell to someone connected to you.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=LMS223655.

Topics:
Money and consumer rights > Taxes
Housing and property > Renting
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EL 1: Outline of subpart: general, or

“This section summarises how deductions for residential land expenses are limited and carried forward”

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EL 3: Definitions for this subpart, or

“Explaining important terms used in tax rules for property income”

Part E Timing and quantifying rules
Allocation of deductions for excess residential land expenditure

EL 2Outline of subpart: specific provisions

  1. Sections EL 4 to EL 8 apply when a person owns a residential rental property and has expenditure or loss that relates to the property for which they are allowed a deduction. For this purpose, the expenditure does not include an amount that is a cost of revenue account property.

  2. The rules in sections EL 4 to EL 8 apply—

  3. to a person’s residential portfolio:
    1. by election, on a property-by-property basis.

      1. A person may choose to apply the rules on a property-by-property basis for an income year to 1 or more properties while applying the rules on a portfolio basis in relation to other properties owned by them.

      2. If a person has excess expenditure under section EL 4, they may use the amount in later income years in which they derive residential income. In certain cases, the amounts are released from the application of the rules.

      3. The following sections set out the properties to which the deduction allocation rule in section EL 4 does not apply:

      4. section EL 9: the person’s main home:
        1. section EL 10: property held by the person on revenue account:
          1. section EL 11: property held by certain persons and entities:
            1. section EL 12: property to which subpart DG (Expenditure related to use of certain assets) applies:
              1. section EL 13: property provided as employee accommodation.

                1. The following sections modify the general rules in this subpart:

                2. section EL 14 relating to the continuity rules for companies:
                  1. section EL 15 relating to transfers between companies in wholly-owned groups:
                    1. sections EL 16 to EL 19 relating to deductions for interest expenditure when a person borrows to invest in a residential land-rich entity.

                      1. Section EL 20 applies when a person derives income under section CB 6A (Disposal within 2 years: bright-line test for residential land) and has expenditure that relates to the land for which they are allowed a deduction as a cost of revenue account property. The section also provides for the treatment of the expenditure when the sale is made to an associated person.

                      Notes
                      • Section EL 2: inserted (with effect on 1 April 2019), on , by section 62(1) (and see section 62(2) and (3) for application) of the Taxation (Annual Rates for 2019–20, GST Offshore Supplier Registration, and Remedial Matters) Act 2019 (2019 No 33).
                      • Section EL 2(5): amended (with effect on 1 April 2019), on , by section 45(1) (and see section 45(2) for application) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                      • Section EL 2(7): amended, on , by section 127 of the Taxation (Annual Rates for 2023–24, Multinational Tax, and Remedial Matters) Act 2024 (2024 No 11).