Rental Loss Ring-Fencing 2025-26: Claiming Property Losses Against Future Income

If you own a residential rental in New Zealand and the property runs at a loss in 2025-26, the loss will not reduce the tax on your salary. The ring-fencing rules in subpart EL of the Income Tax Act 2007 quarantine residential rental losses inside the residential portfolio, where they wait — sometimes for years — until you have rental profit or a taxable property sale to apply them against. With interest deductibility back at 100% for the 2025-26 income year, the interaction between the two rules has changed shape and is worth re-reading carefully.

This article walks through how ring-fencing works in 2025-26, when the portfolio approach beats the property-by-property election, what is excluded from the rules, and how a worked Auckland example plays out across three years.

What ring-fencing actually does

From the 2019-20 income year onward, you cannot use a net loss from your residential rental activities to reduce tax on any other income. The loss is “ring-fenced” — it stays inside a notional residential rental portfolio. Each year you do one of three things with a ring-fenced loss:

1. Offset it against residential rental income from other properties you own (under the default portfolio approach).
2. Offset it against taxable income from the sale of a residential rental property (e.g. a bright-line-caught sale).
3. Carry the unused balance forward to the next income year, indefinitely.

What you cannot do: offset against PAYE salary, contractor income, dividends, interest, business income from non-residential activities, or any other category. The trap that catches most new landlords is assuming a negatively-geared rental will produce an immediate tax refund. It will not — not since the 2019-20 year.

Ring-fencing was introduced as part of the Taxation (Annual Rates for 2019-20, GST Offshore Supplier Registration, and Remedial Matters) Act 2019. The policy intent was to remove a long-standing tax preference where investors could subsidise mortgage interest against PAYE salary, putting them at an advantage over owner-occupiers.

The default portfolio approach

By default, every residential rental property you own is treated as part of a single portfolio. At year end you tally:

• Gross rental income across all properties.
• All deductible expenses across all properties (interest, rates, insurance, management, repairs, chattels depreciation).

If the result is a net profit, that profit is taxable and is reported on your IR3 (or distributed to beneficiaries / partners if held by a trust or partnership). Any prior-year carried-forward ring-fenced losses are released against the profit, reducing what you actually pay tax on.

If the result is a net loss, the loss is added to your carried-forward ring-fenced balance and waits.

The portfolio approach is automatic — you do not need to elect into it. It is the friendliest treatment for most investors because losses on a single bad rental can shelter profits on the others in the same year.

The property-by-property election

You can instead elect to apply ring-fencing on a property-by-property basis. Each property’s losses are tracked separately and can only be released against future income from that same property (or its eventual taxable sale). The election is made on your tax return for the relevant year.

You must use the property-by-property approach if you have mixed-use assets that are subject to subpart DG (see below) or if you have properties that have separately moved in and out of the rental rules.

Investors usually elect property-by-property only when they hold a single loss-making property and want to isolate it from future taxable profit on a different, separately-held property — for example, if you plan to gift one property to a trust and want clean records of which losses follow which asset.

For most multi-property investors, the portfolio approach is materially better because it allows immediate intra-year offset.

What is NOT residential rental property under the rules

Subpart EL applies only to “residential land”. The following are not subject to ring-fencing and continue to allow ordinary loss offset against other income:

Property type	Ring-fenced?
Standard residential rental	Yes
Owner’s main home rented out part-year	Yes (for the rental portion)
Holiday home, bach, mixed-use under subpart DG	No — subpart DG rules apply instead
Commercial property (offices, retail, industrial)	No
Farmland and farmhouses (rural / agricultural)	No
Employee accommodation provided as part of an employment package	No
Hotels, motels, serviced apartments operated as a business	No
Property held on revenue account by a builder, developer, or dealer	No
Short-stay accommodation (Airbnb, holiday letting) where the property is part of a wider business	Generally not, but fact-dependent — get advice

The mixed-use asset rules in subpart DG override ring-fencing for properties that are sometimes rented and sometimes used privately (a bach rented for 80 nights a year, say). Subpart DG has its own apportionment and quarantine machinery — losses from mixed-use periods are also restricted, but under a different framework.

Pure short-stay accommodation (e.g. a property listed full-time on Airbnb that is never used privately) generally is treated as residential rental for ring-fencing purposes unless it has crossed into “business” character.

Interest deductibility in 2025-26 and how it interacts

From 1 April 2025, residential rental interest is 100% deductible for both new builds and existing properties. The earlier phase-out from 2021 has been fully reversed for 2025-26 onwards. See Interest deductibility 2025-26 for the timeline.

This affects ring-fencing in two ways:

1. Larger interest deductions = larger annual rental losses for negatively-geared properties. In 2024-25 only 80% of interest was deductible. The denied 20% reduced the size of the rental loss (and therefore the size of the carry-forward). In 2025-26 the full 100% comes back, so a property whose cashflow has not changed will now post a larger tax loss than it did last year — but still inside the ring-fence. The carry-forward grows faster.

2. Pre-existing carry-forward losses are unaffected. Losses you accumulated in years 2019-20 through 2024-25 sit in your ring-fenced balance as-is. They do not get “topped up” because interest deductibility was restored. They simply wait for rental profit or a taxable sale.

Investors who deferred selling because the 2024-25 deductibility cap made the loss less useful should reconsider: a 2025-26 sale that triggers bright-line will release the full stockpile of carry-forward losses against the sale gain, which is often the moment ring-fenced losses finally get cashed in.

Worked example: three years of an Auckland rental

Investor Sarah owns an Auckland rental purchased in 2022.

Income / expense	2025-26
Gross rent received	$36,000
Mortgage interest (100% deductible)	$30,000
Rates	$4,200
Insurance	$1,800
Property management (8.5% inclusive of GST)	$3,060
Repairs and maintenance (deductible, not capital)	$1,200
Chattels depreciation	$900
Total deductible expenses	$41,160
Net rental loss	($5,160)

Sarah has $5,160 of ring-fenced loss for 2025-26. She also carries forward $7,400 from prior years (accumulated 2022-23, 2023-24, 2024-25 — those earlier years had lower interest deductibility, so the losses were smaller).

Carried-forward total going into 2026-27: $12,560.

Sarah’s PAYE salary of $95,000 is taxed in full at her marginal rates. The rental loss does not touch it.

Year 2: a rent rise

In 2026-27, Sarah lifts the rent to $42,000 and her interest drops slightly as principal is paid down. Her property nets a $1,800 profit. She releases $1,800 of carry-forward against it and reports nil taxable rental income. Remaining carry-forward: $10,760.

Year 3: the bright-line sale

In 2027-28, Sarah sells the property for an $80,000 gain. The sale is within the 2-year bright-line period for residential property (the test applies based on purchase date; see bright-line property test for full mechanics). The gain is taxable.

She releases the full $10,760 of carry-forward losses against the $80,000 bright-line gain, paying tax on $69,240 at her marginal rate. The ring-fenced bucket is now empty.

If the sale had been outside the bright-line period (and not otherwise taxable), the $10,760 would have stayed locked, waiting for the next rental purchase. Many investors who exit residential rental permanently without a taxable sale leave significant ring-fenced losses behind that are effectively never claimed.

When losses are released vs lost

Losses are released (i.e. become useable against the relevant income) in three situations:

1. The portfolio produces a net taxable rental profit in a future year.
2. A residential rental property is sold and the sale is taxable (bright-line, intention to sell, dealer/builder rules, or a section CB 12-23 land transaction).
3. The taxpayer’s whole residential rental portfolio is exited and the final disposal is a taxable sale — in which case any remaining losses release against that final sale.

Losses are effectively lost if:

• You exit residential rental entirely via untaxable sales (e.g. moving in as main home for the required period, then selling outside bright-line as owner-occupier).
• The taxpayer dies with carry-forward losses and the rental properties pass to an estate or beneficiary — losses do not transfer.
• The properties move out of the residential rules (e.g. converted to commercial use) without a release event.

This is one of the harshest features of the regime. Investors who buy a single rental, hold it for a decade, accumulate $40,000+ of carry-forward losses, then sell as owner-occupiers outside bright-line, see the losses simply disappear.

Hub link

Run the numbers on your own portfolio: the Rental Income Tax Calculator takes gross rent and itemised deductions for a single property or a portfolio, applies the 2025-26 100% interest deductibility, and shows how much of the result is taxable income vs added to your ring-fenced carry-forward.

How to claim and track carried-forward losses

On your IR3 each year:

• Report rental income and expenses on the IR3R schedule (residential rental property income).
• If the result is a net loss, the system carries it forward automatically — but only if you tick the residential rental indicator correctly.
• Keep a running spreadsheet of ring-fenced carry-forward, separated by year of origin if you need to track property-by-property elections.

IRD’s myIR shows your prior-year carry-forward on your assessment. Cross-check it every year — manual transcription errors compound and you do not want to discover at sale time that IRD has $3,000 recorded against your $15,000 actual carry-forward.

Keep records for seven years after the tax return is filed. Records to keep:

• Loan statements (proving interest deductibility tracing).
• Council rates demands and insurance schedules.
• Property manager invoices.
• Repair invoices (with a note distinguishing repair from capital improvement).
• Chattels depreciation schedule (initial valuation + annual movement).
• A loss carry-forward schedule across years.

Related reading

• Interest deductibility on rental property in 2025-26 — the deduction side of the equation.
• Bright-line property test explained — when a sale triggers the release of carried-forward losses.
• Mixed-use assets — holiday homes, boats, aircraft — why subpart DG, not subpart EL, applies to baches and part-private rentals.

Summary

For 2025-26:

• Residential rental losses are ring-fenced under subpart EL — they cannot reduce salary or other income.
• The default portfolio approach pools losses across all your residential rentals each year; the property-by-property election is rare and usually unfavourable.
• Carried-forward losses release against future rental profit, against taxable sale income, or stay locked indefinitely.
• 100% interest deductibility in 2025-26 means larger annual losses for negatively-geared properties and faster build-up of carry-forward — useful at eventual taxable sale.
• Commercial property, farmland, mixed-use assets, and employee accommodation are outside ring-fencing.
• Keep precise per-year, per-property records for at least seven years.

If you are planning a sale and have a meaningful carry-forward balance, the timing of the sale relative to the bright-line period can make a five-figure tax difference. Get professional advice before listing.