ACT's proposed $300 million property tax break could change how New Zealand landlords claim losses on their rental properties, potentially putting thousands of dollars back into investors' pockets. In our recent discussion with Matt Harris, Managing Director of Lighthouse Financial, we explored how removing ring-fencing could affect property investors, whether renters might benefit and how likely the proposal is to become law.
What Is ACT's $300 Million Property Tax Break?
ACT’s proposed property tax break centres on reversing New Zealand’s ring-fencing rules, which currently restrict how residential property investors can claim rental losses.
For investors who own negatively geared properties, the change could make a significant difference to their annual cash flow.
But to understand the proposal, it’s important to understand how ring-fencing works.
Under the current rules, if your residential investment property makes a loss, you generally can’t deduct that loss against unrelated income, such as your salary or wages.
Instead, the loss is ring-fenced, meaning it can only be offset against eligible residential property income.
Essentially, the loss is carried forward until it can be used against qualifying income in the future.
Before ring-fencing was introduced, property investors could deduct rental losses against other sources of income, potentially reducing their overall income tax bill.
ACT wants to bring that treatment back.
And according to Matt, the financial implications for negatively geared property investors could be substantial.
How Would Removing Ring-Fencing Work?
Imagine you earn $100,000 a year from your job and own a rental property that makes a $10,000 annual loss.
Under the current ring-fencing rules:
You pay income tax on your $100,000 salary, while the $10,000 rental loss is carried forward to offset against eligible residential property income in the future.
Under ACT’s proposed changes:
You could deduct the $10,000 rental loss against your salary, reducing your taxable income from $100,000 to $90,000.
The amount of tax saved would depend on your personal circumstances and applicable tax rate.
Matt explained that for someone paying the top marginal tax rate of 39%, a $10,000 deductible loss could result in a $3,900 tax saving.
That’s money that could potentially help cover the costs of owning the property, reduce debt or be invested elsewhere.
And for investors carrying significant rental losses, the difference could be particularly meaningful.
Why Matt Harris Supports the Property Tax Break
A $300 million property tax break for landlords is naturally going to attract criticism.
After all, why should property investors receive additional tax relief when many New Zealand households are already under financial pressure?
But Matt believes there’s a strong argument for reconsidering the current rules.
And it comes down to consistency.
At the moment, residential property investment is treated differently from other types of investment when it comes to offsetting losses against unrelated income.
Matt highlighted the example of two people who earn salaries and invest in commercial property.
If their commercial investment generates an eligible loss, they may be able to offset that against other income.
However, if those same investors purchase a residential rental property, the ring-fencing rules restrict their ability to do the same thing.
For Matt, that’s an inconsistency within the tax system.
His argument isn’t simply that landlords deserve a tax break.
It’s that people in comparable financial situations should receive consistent tax treatment.
He also pointed out that businesses and commercial property investments can generally deduct eligible losses against other types of income, making residential property something of an exception.
From that perspective, removing ring-fencing isn’t necessarily about creating a new benefit for landlords.
It’s about restoring a tax treatment that was previously available and bringing residential property investment more closely into line with other investments.
Why Were Ring-Fencing Rules Introduced?
The Labour Government introduced ring-fencing at a time when New Zealand’s property market was experiencing significant price growth, driven by low interest rates and limited housing supply.
According to Matt, the Government’s approach was to reduce demand for investment properties by removing some of the financial incentives associated with owning them.
Rather than addressing the supply issues contributing to rising house prices, which would have taken considerably longer, the Government introduced tax changes designed to make property investment less attractive.
Ring-fencing was one of those changes, restricting investors’ ability to offset rental losses against their other income.
While Matt acknowledges there were broader policy considerations behind the decision, he believes the restrictions were largely intended to discourage property investment and help slow the housing market.
But with interest rates, ownership costs and rental market conditions having changed significantly since then, the question is whether those restrictions still make sense today.
Why Property Investors Could Benefit From Removing Ring-Fencing
The past few years haven’t been particularly easy for many New Zealand property investors.
As Matt explained, landlords have faced a combination of rising interest rates, insurance premiums, repairs, maintenance costs and changes to tax deductibility.
Meanwhile, rental income hasn’t necessarily increased at the same pace.
For investors with negatively geared properties, that creates a challenging situation.
They’re paying more to own and maintain their rental properties while continuing to cover the shortfall between their income and expenses.
And although those rental losses can potentially be used against eligible property income in the future, that doesn’t necessarily help with today’s cash flow.
Matt believes this is one of the strongest arguments for removing ring-fencing.
Why the Timing of Tax Deductions Matters
One of the interesting points raised during the discussion was that the proposed changes aren’t necessarily about whether investors can ever use their rental losses.
They’re also about when those losses become useful.
We discussed an example involving retired property investors who had accumulated approximately $300,000 in rental tax losses across their portfolio.
Their plan was to sell properties, reduce their debt and gradually work through those accumulated losses.
But as Matt pointed out, it could take years to use them.
And money received through tax relief today could be considerably more useful than a deduction that isn’t realised until much later.
For example, investors might be able to use earlier tax savings to reduce mortgage debt, improve cash flow or invest in other opportunities.
There are also situations where investors may never fully utilise their accumulated losses.
If they sell their rental properties before generating sufficient eligible income, some losses may ultimately remain unused.
For Matt, allowing investors to offset losses against other income would provide more immediate financial relief.
And that could make a meaningful difference to the ongoing affordability of holding an investment property.
Could ACT's Tax Changes Actually Benefit Renters?
One of the more interesting arguments discussed during the episode was whether reducing costs for landlords could also benefit tenants.
At first glance, a tax break for property investors doesn’t sound like something that would make life easier for renters.
But Matt believes there’s a reasonable argument that it could.
The reasoning comes down to the relationship between rental income and the cost of owning a property.
According to Matt, landlords have experienced substantial increases in ownership costs over recent years.
Yet rental prices haven’t necessarily kept pace.
He suggested there are two reasons for this.
Firstly, the rental market doesn’t always support higher prices.
Even if a landlord’s expenses increase, that doesn’t automatically mean tenants are willing or able to pay more.
Secondly, many New Zealand landlords are mum-and-dad investors who value having reliable, long-term tenants.
Rather than increasing rent every year, some landlords go several years without making significant changes.
Matt believes reducing the financial pressure on these investors could help ease the need to pass higher ownership costs on to tenants.
Could Rent Increases Slow Down?
If landlords receive tax relief that reduces the effective cost of holding a rental property, they may feel less pressure to increase rents.
That doesn’t mean rents would automatically fall.
Rental prices are still influenced by what the market can support, and individual landlords will make different decisions.
However, Matt believes there’s a possibility that reducing ownership costs could help slow future rental increases, or potentially contribute to lower rents in some situations.
And that could be particularly valuable for tenants who are already managing rising living costs.
If landlords have more money available after covering their expenses, they may be in a better position to maintain and improve their rental properties.
Matt pointed to the costs associated with meeting Healthy Homes requirements, which he supports, while acknowledging the financial burden they placed on landlords.
Owning a rental property involves more than collecting rent.
There are ongoing maintenance costs, vacancies, property management expenses and improvements that need to be funded.
Reducing some of that financial pressure could make it easier for landlords to continue investing in the quality of their properties.
Of course, these are potential benefits rather than guaranteed outcomes.
But they demonstrate why the implications of the proposal could extend beyond property investors themselves.
Will ACT Actually Succeed in Removing Ring-Fencing?
The biggest question is whether the proposed changes will ever become law.
And Matt isn’t convinced either way.
While he strongly supports removing ring-fencing, he acknowledged that ACT would likely need to negotiate the policy as part of a wider government arrangement.
That could make it difficult to secure enough political support.
The outcome would also depend on which parties form the next government and what other tax policies are being considered.
One factor Matt believes could influence the debate is the potential introduction of a capital gains tax.
Could a Capital Gains Tax Change the Equation?
Matt suggested that removing ring-fencing could become more likely if New Zealand introduces a capital gains tax.
His reasoning is that if investors are required to pay tax on the eventual gain when selling an asset, there’s a stronger argument for allowing them to deduct eligible losses incurred while holding it.
In other words, the treatment of investment gains and losses should be considered together.
For Matt, this would create a more consistent approach to taxing investments.
But he was clear that the outcome remains uncertain.
When asked how confident he was that ring-fencing would be removed, he put the chances at roughly 50/50.
Ultimately, the proposal will depend on political negotiations and the direction of New Zealand’s wider tax policy.
For now, investors should understand what ACT is proposing, how the changes could affect their financial position and why the debate matters.
Key Takeaways
- ACT is proposing a $300 million property tax break. The policy would remove ring-fencing restrictions and allow eligible residential rental losses to be deducted against other sources of income.
- Ring-fencing currently limits how rental losses can be used. Investors generally have to carry losses forward to offset against eligible residential property income rather than deducting them against salary or wages.
- The potential tax savings could be significant. Matt’s example showed that a $10,000 deductible rental loss could produce a $3,900 tax saving for someone paying the 39% marginal tax rate.
- Matt believes the current rules create inconsistencies. His argument is that residential property investors should receive tax treatment more closely aligned with other types of investment, including commercial property.
- Earlier access to tax relief could improve investors’ cash flow. Rather than waiting years to utilise accumulated losses, investors could potentially use the savings to reduce debt or cover ownership costs.
- Renters could benefit indirectly. Reducing financial pressure on landlords may help slow rental increases, although lower rents are not guaranteed.
- Tax relief could support property maintenance. Improved cash flow may give landlords more flexibility to fund repairs, maintenance and improvements.
- Removing ring-fencing could make property investment more attractive. The changes would reduce the effective cost of holding negatively geared properties, particularly during the early years of ownership.
- The proposal is far from guaranteed. Matt believes its chances will depend on political negotiations, the next government and whether a capital gains tax becomes part of the wider discussion.
Next Steps:
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