Residential rental property workpapers

The Residential rental disclosures are available from the 2020 tax years onward. 

Step 1: Add Accounts to the Trial Balance or add workpapers as required

Import the trial balance from Excel or Xero or manually add accounts, as required. 

Users can also use the Rental property income or Rental property expense workpapers that can be created from Workpapers > Workpapers, for certain entity types.

Step 2: Edit the Tax Form Disclosures

Once the accounts have been added/imported to the Trial Balance, the Tax Form disclosure needs to be updated. This is done on the workpaper.

Click the account to open it in order to assign the relevant Tax form disclosure.

For 2023 tax year onward, residential rental income has 3 disclosure types: Gross residential income, Net bright line profits and Other residential rental income.

For prior years, use Residential rental income.

For all years, residential rental expense disclosure type is Residential rental deductions.

Step 3: Add a Residential Rental Interest Deduction Workpaper (2022 Tax Years Onwards)

Add a Residential rental interest deduction workpaper to any domestic residential rental interest accounts. Populate the amount of non-deductible interest and select the reason(s) any remaining amount is deductible.

This workpaper can also be added directly through Workpapers > Workpapers. Ensure the total amount of interest is entered (as a negative).

Step 4: Update and Review the Residential Rental Properties Workpaper

Go to Workpapers > Residential rental properties to access the Residential rental deductions workpaper. The system will populate Income (For 2022 and prior years), Gross residential rental income, Net bright line profits, Other residential rental income and Deductions from current period based on the Tax form disclosures selected above.

Enter the Deductions claimed this year (as a negative) under Net residential rental income section. This will calculate the Residential rental deductions carried forward amount under Residential rental deductions carried forward section.

Completing IR7 and IR10 with Residential Rental Income/Deductions Disclosures

IR have prescribed how Residential rental income and deductions disclosures are included in the IR7. Residential rental deductions are not to be included in Total income/loss and Total income/loss after expenses disclosure points on the IR7 (Boxes 23 and 25, respectively) . These disclosures only include the Residential rental income for the period.

In TaxLab, the Total income/loss for the period is displayed on Reports > Tax return > IR7 tab. Total income/loss and Total income after expenses is shown on the Income tax calculation sub tab.

Per the IR10 guide for the 2023 year onwards, Current year taxable profit/loss on the IR10 (IR10 Box 29) should match Total income/loss after expenses on the IR7 (IR7 Box 25). TaxLab populates the Current year taxable profit/loss amount based on the IR7 disclosures. The residential rental deduction amount goes through as part of the Tax adjustments disclosure on the IR10 (IR10 Box 28).

Distributions in the IR7P/L

Residential rental income and deductions are distributed via the IR7P/L to the recipients. Additionally, details of the total residential interest, allowable residential interest deduction and reasons are also required to be distributed to recipients. This is because the recipient is required to declare their share of residential interest details received from the partnership or look-through company on their own tax return.

Claiming Foreign Tax Credits on Residential Rental Income (IR3 Taxpayers)

Use the Foreign rental income and Foreign rental expense workpapers to disclose income and expenses for overseas rental properties. Foreign tax credits can be included on the Foreign rental income workpaper.

Ensure the Jurisdiction, Type and Description are set the same for income and expenses that belong to the same property to ensure the foreign tax credit limitation rules are applied correctly.

If the property is subject to the residential rental ring-fencing rules, select the relevant tax form disclosure on the workpaper, for example Gross residential rental income. This ensures that the income and deductions are reflected on the Residential rental properties workpaper where the allowable deductible amount can be entered as per normal. The Overseas Income Summary (IR1261) and the Overseas income boxes on the IR3 will only disclose the allowable tax credits and zero income. This is because the income is declared in Residential rental income section on the IR3.

If the property is not subject to the residential rental ring-fencing rules, the tax form disclosure should remain as Overseas income.

Claiming Foreign Tax Credits on Residential Rental Income (Non-IR3 Taxpayers)

The IR tax returns do not have a space for a tax credit to be associated with residential rental income therefore it is not immediately clear how best to disclose foreign tax credits claimable on foreign residential rental income. 

The latest guidance we have from IR is to declare this as follows:

• Include the claimable foreign tax credits in the overseas income section. This should be done using the Manual override function in the Foreign tax credits module of TaxLab.
• Include the foreign residential rental income in the residential property section. This is the same as you would record domestic residential property income and expenses.
• Provide correspondence to IR explaining the claim of foreign tax credits for foreign residential property income. This is best done by submitting a Securemail item through the myIR website.

Please be aware the tax return may not be processed at IR immediately because the foreign tax credits will be greater than the overseas income. The return may also be assessed prior to IR processing the myIR correspondence and therefore result in an initial incorrect assessment.