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Inland Revenue

Tax Policy

Chapter 4 - Portfolio basis

4.1 It is suggested that the loss ring-fencing rules should apply on a portfolio basis. That would mean that investors would be able to offset losses from one rental property against rental income from other properties – calculating their overall profit or loss across their portfolio.

4.2 The alternative – a property by property basis – would mean that each property would need to be looked at separately, with losses on one not able to be offset against income from another.

4.3 A property by property approach would be stricter than a portfolio approach, achieving the highest level of ring-fencing. However, it would add complexity, as losses would need to be tracked separately for each property. Moreover, a property by property approach may just result in taxpayers with portfolios re-balancing their debt funding to avoid having loss-making properties (or at least minimising the extent to which any particular property is loss-making). That response to the rules applying on a property by property basis would be inefficient, and may mean that this approach may have no real advantage over a portfolio approach – adding considerable complexity and increasing compliance costs for no real gain.

4.4 Also, a property by property approach may be seen as unfair in that if a taxpayer has two properties and breaks even on the portfolio overall, the taxpayer’s tax position would depend on whether they break even on both properties or make a gain on one and a loss on the other.

4.5 We therefore suggest that the ring-fencing rules apply on a portfolio basis, so a person with multiple properties would calculate their overall profit or loss across their whole residential portfolio.