Residential Rental Property Deductions (Ring-Fencing)

When you own a rental property, you’re likely to have maintenance and administrative costs. You can claim all or some of these costs as a deduction against your rental income. This reduces the tax you pay on the rental income you receive.

You can claim deductions up to the amount of rental income you earn in a year, including income from the sale of a property. This is called ring-fencing. Because rental deductions can be claimed only against rental income, you cannot offset excess deductions against other income such as salary or wages.

When you have excess deductions, you must carry them forward from year to year and deduct them when your residential property makes income.

Property the residential property deduction rules apply to
The residential property deduction rules apply to all your residential land including your overseas residential property.
Residential land includes property used for short-stay accommodation if the dwelling is not the owner’s main home. This includes business premises rented out through a digital platform. For example, Airbnb, Bookabach, and other holiday homes.

Property the rules do not apply to
The residential property deduction rules do not apply to:
• your main home. If you have more than 1 home, this is the home you have the greatest connection with.
• property that comes into the mixed-use asset rules (for example holiday homes)
• property that will be taxed on sale, regardless of when it’s sold. Unless the property was acquired for a land-related business, you must let us know for it to be excluded from the residential property deduction rules.
• farmland
• property used mainly as business premises.
• property owned by a company other than a close company.
• employee accommodation
• property owned by Government enterprises.

When can I use excess deductions?
When you’re left with unused excess deductions after a property sale you still might be able to use them. It depends on:
• what basis (Individual or Portfolio) you’re using to work out your residential property deductions.
• if the sale was taxable.

Transferred residential rental property excess deductions
You may have transferred excess deductions when there’s been a non-taxable sale of:
• individual property
• property in a portfolio.
You’re able to transfer excess deductions to any other residential property you have. That property can be using either the portfolio or individual property basis.
Transferred excess deductions are always subject to the residential property deduction rules.

Transferred excess deductions when you have no residential rental property
Sometimes you’ll have excess deductions to transfer but no property to transfer them to. If this happens you carry the excess deductions forward from year to year.
You keep carrying them forward until you earn income from a residential rental property in the future. You can then treat them as transferred to that future property.
You need to track transferred excess deductions. You do this up until they’re used.
You cannot ever use your excess deductions against other income, such as salary and wages. This is known as the ring-fencing rules.

Selling property with transferred excess deductions
When you sell a property, and the sale is taxable you can usually use its excess deductions. You can use them against the sale income and your other income.

The amount of excess deductions you can use is lower if the property has transferred excess deductions. You’ll need to lower the amount of excess deductions you can use by the amount you’ve transferred to the property.

The comments in this article are of a general nature and should not be relied on for specific cases, where readers should seek professional advice.