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Income Tax Act 2007

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

EL 4: Allocation of deductions for loss-making residential rental properties

You could also call this:

“How to handle losses from rental properties for tax purposes”

This law talks about what happens when you own rental properties and lose money on them. If you spend more money on your rental properties than you make from them in a year, you can only claim a deduction up to the amount of money you earned from those properties. You can’t claim more than that.

If you spent more than you earned, the extra amount you spent doesn’t disappear. You can save it and use it in a future year when you make more money from your rental properties. This is called carrying it forward.

You can only count each bit of rental income once when working out how much you can claim.

There are some special rules that change how this works. If you choose to apply these rules to each property separately, you need to look at section EL 6. If you sell all your rental properties or just one of them, you need to check sections EL 5 and EL 7.

This law doesn’t apply to the cost of property that you buy to sell for a profit. That’s covered by a different rule called section DB 23.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=LMS223669.

Topics:
Money and consumer rights > Taxes
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Part E Timing and quantifying rules
Allocation of deductions for excess residential land expenditure

EL 4Allocation of deductions for loss-making residential rental properties

  1. This section applies for an income year when a person is allowed a deduction for expenditure or loss incurred in relation to 1 or more properties in their residential portfolio, excluding any amount of a deduction under section DB 23 (Cost of revenue account property).

  2. The amount of the deduction that may be allocated to the income year must be no more than the amount of the person’s residential income for the income year. An amount identified as a person’s residential income may be counted only once in making an allocation under this subpart.

  3. To the extent to which the amount of the person’s deduction is more than their residential income, the excess amount is—

  4. suspended as a deduction for the income year; and
    1. carried forward to a later income year in which the person derives residential income; and
      1. added to the amount of the deduction for expenditure or loss referred to in subsection (1) for the later income year.

        1. The application is modified by—

        2. section EL 6 when a person chooses to apply the rules in this subpart on a property-by-property basis:
          1. sections EL 5 and EL 7 when a person disposes of their residential portfolio or residential rental property, as applicable.

            Notes
            • Section EL 4: 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 4(2): amended (with effect on 1 April 2019), on , by section 107 of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).