Every year we sit down with a new client who owns a rental property, and every year the same question comes up: “My rental made a loss this year; can I use that to bring down the tax on my salary?”
The answer, for the vast majority of residential landlords, is no. And if nobody has explained why, it can feel like a nasty surprise at exactly the wrong time, when you’re already digesting a return that shows tax due, not a refund.
This is down to a set of rules known as loss ring-fencing, and if you own or are thinking about buying a residential rental property in New Zealand, it’s essential to understand how they work.
What is ring-fencing?
Ring-fencing means your rental property deductions can only be claimed against your rental property income not against your salary, wages, or other business income.
Before these rules came in, if your rental costs (interest, rates, insurance, repairs, management fees and so on) exceeded your rental income, that shortfall the loss could be deducted against your other income. For someone on a high salary with a negatively geared property, this could meaningfully reduce their overall tax bill. It’s often referred to as negative gearing.
Since the 2019–20 income year, that’s no longer allowed for most residential landlords. If your rental expenses are more than your rental income, the loss doesn’t disappear but it also can’t touch your salary. Instead, it’s “ring-fenced”: locked inside your rental activity and carried forward to a future year, to be used only against future rental income.
A quick example
Say you own one rental property. This year:
- Rental income: $28,600
- Rental expenses (interest, rates, insurance, management fees, repairs): $34,400
- Result: a $5,800 loss
Under the old rules, that $5,800 could have reduced the tax on your PAYE salary. Under ring-fencing, it can’t. Instead, the $5,800 is carried forward and sits waiting until your rental property (or portfolio) makes a profit in a future year, at which point it reduces that future taxable rental income.
Your salary, in the meantime, is taxed in full as if the rental loss never happened.
Who does this apply to?
The rules apply to residential rental property, regardless of how you hold it; as an individual, in a partnership, through a look-through company (LTC), or via a trust. IRD built the rules deliberately wide so that changing your ownership structure wouldn’t let you sidestep them.
A few categories sit outside the ring-fencing rules, including:
- Your main home — if you have more than one, this is the one you have the greatest connection with
- Mixed-use assets — e.g. a bach that’s used both privately and for income, and is left unused for at least 62 days in the year. If it doesn’t clear that 62-day threshold, it doesn’t qualify for this carve-out and the standard rules apply instead
- Land held by a land-related business (development, subdivision, building, or dealing)
- Farmland and land used mainly as a business premises — ring-fencing is specifically a residential property rule
- Revenue account land — land that will be taxed on sale regardless of when it’s sold. This isn’t automatic; you need to notify IRD that the land is held on revenue account, and keep its deductions separately identifiable
If none of those apply to you, and you own a standard residential rental, ring-fencing almost certainly applies.
A note on short-stay accommodation (Airbnb, Bookabach, etc.). It’s tempting to assume that because a short-stay rental operates like a business, it falls under the “business premises” exclusion above. It doesn’t. Since the 2021–22 income year, IRD’s definition of “residential land” was specifically amended to bring short-stay accommodation back within the ring-fencing rules, provided the dwelling isn’t your main home. In practice, this means losses from an Airbnb-style rental are ring-fenced in exactly the same way as a standard long-term rental, they can’t be used to offset your salary or other income.
Portfolio basis vs property-by-property
If you own more than one rental, IRD gives you a choice in how ring-fencing applies:
Portfolio basis (the default). Losses from one rental can offset income from your other rentals. Only the net result across your whole portfolio is ring-fenced. This is simpler and is what happens automatically if you don’t elect otherwise.
Property-by-property basis. You can elect in your tax return to ring-fence losses separately for each individual property rather than pooling them. This needs to be notified to IRD, and for properties bought after the 2019–20 year, the election has to be made in the return for the year you acquired the property.
Why does this matter? Ring-fenced losses can eventually be “released” freed up to offset any other income, including salary but when that happens depends on which basis you’re on. Under property-by-property, if you sell one specific loss-making property in a transaction that’s taxable (for example, within the bright-line period), that property’s unused losses are released at that point, even if you still own other rentals. Under the portfolio basis, release only happens when you dispose of the last property remaining in the portfolio, and only if every sale within that portfolio was taxable so the losses generally stay locked up for longer, tied to the whole portfolio rather than the one underperforming property. It’s a structuring decision worth discussing with your accountant before you file the return for a newly purchased property, since the window to elect closes quickly, and once you move a property onto the portfolio basis you can’t switch it back.
Does the return of full interest deductibility change any of this?
No; and this is a common point of confusion. From 1 April 2025, mortgage interest on residential rental properties became fully deductible again after several years of being progressively restricted. That’s genuinely good news for landlords’ cash flow and lowers the chance of running a loss in the first place.
But interest deductibility and ring-fencing are two separate rules. Restoring interest deductibility did not touch the ring-fencing legislation. If, even with full interest deductions, your rental still runs at a loss, that loss is still ring-fenced exactly as before.
What you can actually do about it
Ring-fencing isn’t something you can opt out of, but there are legitimate ways to manage its impact:
- Keep meticulous records of carried-forward losses. This is the single biggest practical risk we see. If ring-fenced losses aren’t tracked correctly year to year, they’re easy to lose track of and very difficult to reconstruct several years later. Make sure whoever prepares your return is carrying these forward accurately every year.
- Review your portfolio-vs-property-by-property election if you’re planning to sell a loss-making property in the near term, or if you’re about to add a new property to your portfolio.
- Model your cash flow with ring-fencing in mind, not just gross yield. A property that looks fine on paper can still create a tax timing mismatch — you’re paying tax on other income at full rates while your rental loss sits unused.
- Reassess negative gearing as a strategy. With losses no longer sheltering other income, buying a property that’s expected to run at a loss for years needs a different justification than it did before 2019; usually capital growth expectations, not tax minimisation.
- Talk to us before you buy, not after. Structuring decisions (ownership entity, financing, election choices) are far easier to get right at purchase than to unwind later.
The bottom line
Ring-fencing catches out a lot of otherwise well-informed landlords simply because it’s a quiet rule, there’s no dramatic announcement each year, just a smaller-than-expected refund. If your rental property is running at a loss, that loss hasn’t vanished; it’s parked, waiting for a profitable year or a taxable sale. Understanding that distinction now means no surprises at filing time.
If you’re not sure whether your losses are being carried forward correctly, or you’re weighing up a property purchase and want to understand how ring-fencing will affect your position, get in touch; this is exactly the kind of thing worth getting right from day one.
This article is general information only and doesn’t take into account your personal circumstances. Speak to us for advice specific to your situation.