Residential rental interest and ring-fenced loss
Hana owns a Wellington townhouse acquired on 1 August 2022 and rented from 1 September 2022. For the year ended 31 March 2025 she received rent of $40,000. Her mortgage interest was $38,000, and rates, insurance and repairs were $12,000. She claims chattel depreciation of $1,500. Hana also earns a salary of $95,000 and has no other rental properties. She is worried that the rental loss will reduce her salary tax. She has heard that interest deductibility is changing and asks whether she should delay repairs until after 1 April 2025. The townhouse was not a new build. She uses a standard 31 March balance date and is not GST-registered. The mortgage is secured over the townhouse. She has no ring-fenced losses brought forward.
1. Calculate Hana's net rental result for the year ended 31 March 2025, showing the deductible interest.
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For the year ended 31 March 2025, the applicable interest limitation percentage is 80% for a property acquired after 27 March 2021 and not a new build. Deductible interest is $38,000 × 80% = $30,400. The other deductions are rates, insurance and repairs of $12,000 plus chattel depreciation of $1,500, totalling $13,500. Total deductions are $30,400 + $13,500 = $43,900. Rental income is $40,000, so the net rental loss is $40,000 − $43,900 = $3,900. The disallowed interest is $38,000 × 20% = $7,600. That disallowed amount is carried forward under the interest limitation rules and may be deductible in later years, subject to the rules.
2. Can the $3,900 loss reduce Hana's salary tax? Explain the ring-fencing rule.
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No. Residential rental losses are ring-fenced. A loss from a residential rental property cannot be offset against salary, wages, business income or other non-rental income. Hana's $3,900 rental loss is carried forward and can only offset future residential rental income, subject to the ring-fencing rules. Her salary of $95,000 is taxed separately. The result is that the rental loss produces no immediate tax refund against her salary.
3. What changes for the year ending 31 March 2026, and should Hana delay repairs?
Read the worked answer
From 1 April 2025, interest on the townhouse is 100% deductible, assuming the property remains subject to the ordinary residential rental rules. For the year ending 31 March 2026, Hana can deduct the full $38,000 of interest, subject to the actual interest incurred. She can also use the $7,600 carried-forward disallowed interest if the rules permit. Delaying repairs is unlikely to be advantageous. The deductibility of repairs depends on whether the work is repair or capital improvement, not on the date alone. If the repairs are necessary and revenue in nature, they are deductible when incurred. If they are capital, they are not immediately deductible regardless of timing. She should not defer essential repairs merely for tax reasons.