Residential rental property workpapers & disclosures

Overview

Residential rental workpapers are used to correctly return and disclose residential rental income and expenses in your tax return. Workpapers and disclosures are completed separately from each other, so need to be worked through individually. Disclosures are available from the 2020 tax year onwards, the interest deduction workpaper is available from the 2022 tax year onwards. 

Record rental property income & expenses

Step 1: Add accounts to the trial balance or workpapers

Import your trial balance from Excel or Xero, or manually create accounts.

You can also directly add rental income and expenses by using the Rental property income, Rental property expense or Residential rental property interest workpapers. These can be created under Workpapers > Workpapers and availability depends on the specific entity type.

Step 2: Edit tax form disclosures

Once accounts are added or imported, update the tax form disclosure:

• From the trial balance, select the name of the account to open it and assign the correct tax form disclosure or,
• From the Workpapers screen, select the relevant rental property to open it then select the required workpaper and assign the correct tax form disclosure.
• For 2023 onwards, residential rental income has three disclosure types:
  • Gross residential income.
  • Net bright-line profits.
  • Other residential rental income.
• Years prior to 2023, use Residential rental income.
• Residential rental expense disclosures are Residential rental deductions for all years.

Step 3: Add a residential rental interest deduction workpaper (2022 onwards)

If you have domestic residential rental interest accounts, add a Residential rental interest deduction workpaper. Enter:

• The non-deductible interest amount.
• The reason(s) for any remaining deductible amount.

You can add this workpaper to an account on the trial balance, or on the workpapers screen. The total interest expense should display as a negative value, and any non-deductible portion that you enter as a positive value.

Step 4: Update and review the residential rental properties workpaper

Go to Workpapers > Residential Rental Properties to access the residential rental properties summary workpaper. The system will automatically populate:

• Income (for 2022 and earlier years).
• Gross residential rental income.
• Net bright-line profits.
• Other residential rental income.
• Deductions from the current period (based on tax form disclosures).

Enter deductions claimed this year as a negative value under the Net Residential Rental Income section. This calculates Residential Rental Deductions Carried Forward in the next section.

If this is the entity's first year in TaxLab and there are prior year deductions to carry forward, enter these as a negative value in Adjustments. 

Select the basis you are using to claim your deductions from the Method section (portfolio, individual or combined).

Note: The software does not track income and expense by property, these should be maintained in your own records.

IR7 and IR10 residential rental disclosures

IR have specified how to include residential rental income and deductions in the IR7 and IR10:

• Residential rental deductions are not to be included in the Total income/loss or Total income/loss after expenses on the IR7. Only residential rental income is to be included.
• In TaxLab, find these figures under Reports > Return > Income Tax Forms > Income Tax Calculation.
• Current year taxable profit/loss on the IR10 must match Total income/loss after expenses in the IR7. Therefore, the residential rental deduction amount is reported under Tax adjustments in the IR10.

Claiming foreign tax credits on residential rental income

For IR3 taxpayers

Use the Foreign rental income and Foreign rental expense workpapers to disclose income and expenses from overseas rental properties. Foreign tax credits are recorded in the Foreign rental income workpaper.

• Ensure the Jurisdiction, Type of income and Description for segmentation are set the same for income and expenses that belong to the same property so that the foreign tax credit limitation rules are applied correctly.
• If the income is subject to residential rental ring-fencing rules, select a relevant tax form disclosure (e.g., Gross residential rental Income). This ensures income and deductions appear correctly in the Residential Rental Properties workpaper.
• The Overseas income summary (IR1261) and Overseas income sections of the IR3 will only show allowable tax credits but no income because this is declared under Residential Rental Income in the IR3).
• If not subject to ring-fencing rules, use Overseas income as the tax form disclosure.

For Non-IR3 taxpayers

The IR tax returns don’t have a dedicated section for tax credits linked to residential rental income. Based on IR’s latest guidance, follow these steps:

• Declare claimable foreign tax credits in the Overseas income section of your tax return using the Manual override function in the Foreign Tax Credits module.
• Record foreign residential rental income in the Residential Property income section of your tax return (same as domestic properties).
• Submit correspondence to IR (via Securemail on the myIR website) explaining the claim.

The tax return may not be processed immediately because the foreign tax credits may exceed overseas income. Alternatively, IR may incorrectly assess the return before processing your myIR correspondence, leading to an initial incorrect assessment.

Troubleshooting

I can’t record Residential rental deductions carried forward by property

The software does not track individual properties. We recommend preparing your own workpapers to track income and expenses by property, even if you are using the Portfolio method.

How do I enter prior year deductions that are not in TaxLab?

If this is the entity’s first year in TaxLab and there are prior year deductions that need to be accounted for you can enter them in Workpapers > Residential Rental Properties > Adjustments. These will need to be entered as a negative value. 

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