Business Accountants: Property Investors Back in Business: New Bill Brings Significant Property Tax Changes

 

Property investors are poised for a resurgence with the release of a new bill promising substantial changes to property tax laws. This long-awaited legislation aims to fulfill pre-election promises to restore interest deductibility for residential lending, offering much-needed clarity and relief to property investors.


Key Changes for Property Investors


The bill addresses several misconceptions about “tax breaks” for landlords and aims to reintroduce fairness by allowing interest deductions on borrowed money used to purchase income-earning assets—a benefit available to other industries.


Interest Deductibility


  • 2024: 50% deductibility (adjusted from the initially promised 60%).
  • 2025: 80% deductibility.
  • 2026: 100% deductibility.

These deductions will apply to all residential property, regardless of the acquisition date after March 27, 2021. This means that if you purchased a non-new build property after this date, you will benefit from 80% deductibility in the 2025 tax year.


Brightline Test


  • Reduction to Two Years: The brightline test period will be reduced to two years for property sales from July 1, 2024.
  • Main Home Exemption: Simplification of the main home exemption rules.
  • Rollover Relief: Expanded rollover relief provisions to cover all transfers of land between associated persons, aiding in estate planning.

Depreciation on Commercial Buildings


  • Depreciation Removal: The 2% depreciation deduction on commercial buildings will be removed starting from the 2025 income year.
  • Fit-Out Depreciation: The ability to depreciate separately identified fit-out and chattel items will remain.

Remaining Rules


  • Loss Ring Fencing: The loss ring fencing rules for residential landlords remain. If restored interest deductions push you from profit to loss, these losses can only be offset against residential rental income, not other personal income.

Implications and Actions for Property Investors


Tax Liability and Interest Deduction


If you incur a tax liability from a sale within the brightline period, you will be permitted to claim the interest previously denied as a deduction against the brightline gain.


Commercial Property Considerations


For commercial property acquisitions, the purchase price apportionment rules require both the vendor and purchaser to agree on the split between land, buildings, and fit-out. It is essential to negotiate and determine the fit-out value with the vendor as post-settlement valuations are no longer permissible.


These tax changes aim to revitalize the private landlord sector in New Zealand, providing clearer guidelines and reinstating beneficial deductions for property investors. The phased restoration of interest deductibility, adjustment of the brightline test period, and changes to depreciation rules collectively contribute to a more equitable and functional property tax environment.


Ready to optimize your property investments under the new tax regulations? Contact our team of experts to navigate these changes and maximize your benefits.

 

 

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