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Residential rental property tax changes

In 2021, the government announced a number of tax changes affecting residential rental property investors. How do these changes apply to you?

The following tax changes for residential rental property acquired on or after 27 March 2021 have been announced:

  • a 10 year (rather than 5 year) bright-line test applies. This doesn’t apply to “new builds” (defined as properties up to 20 years old, regardless of changes in ownership, where the 5 year test continues to apply)
  • no deductibility of interest on loans used to acquire residential rental property, unless it’s a new build, from 1 October 2021.

For existing holdings of residential rental properties there is a phase out of interest deductibility, over a four-year period starting 1 October 2021.

‘Change of use’ rule – If the sale of your property is subject to the bright-line test, and you don’t use a property as your main home for 12 months or more, you will be required to pay income tax on a proportion of the profit made through the property increasing in value.

Ring-fencing of residential property losses – applicable from the 31 March 2021 income tax year, losses from residential property rentals can no longer be offset against other income, but instead must be ring-fenced and carried forward to apply to residential rental income in future income tax years. Depending upon the number of properties you own, you can choose to apply the ring-fencing on an individual or portfolio basis.

Talk to us for specific advice relating to your circumstances.

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