There’s been a lot of talk about property tax lately, and the Government certainly loved giving us a bit of shock factor after it proposed some major changes to it earlier in the year. Now that we have well and truly reached ‘D-day’ on the proposed amendments, residential property investors are finally face to face with the hard copy of those changes. It may be a hard pill to swallow, but just like every change in tax policy, these new rules come with good intentions.


Property investment tax


The Government wants more people to purchase their own houses, ironically by removing some investor incentives that may lead to increasing rents and decreasing rental housing. This is the Government’s latest stab at addressing the country’s long-standing housing affordability problem and hopefully bring about more sustainable house prices and a less competitive housing market.


Let’s take a deep dive and look at the proposed new property tax rules closely. The proposals include a shortened “new build” bright-line test and limit in interest deductibility.


What’s changing


The bright-line test shortened to 5 years


Firstly, what is the bright-line test?


The bright-line test, combined with Capital Gains Tax is a way to tax the financial gains people make from buying and selling a residential property for the purpose of making a profit.


Basically, if you sell a residential property you’ve owned for less than five years (and it has not been your main home during this period), you may be required to pay income tax on the profit made from the sale.


The bright-line test has undergone many changes over the years. See where your property falls under the new rules, and how this may affect your tax payable once it’s time for you to sell:


When the property was acquired

The bright-line period that applies

On or after 27 March 2021, unless the property is
a “new build”

10 years

Between 29 March 2018 and 26 March 2021
(inclusive) for properties which are not “new builds”
On or after 27 March 2021 for properties which are “new builds”

5 years

Between 1 October 2015 and 28 March 2018
(inclusive)

2 years

 Deloitte


Limited interest deductibility


Residential rental property owners can typically claim loan interest as tax-deductible – or at least they used to:


Residential investment properties that can be used for “long term accommodation” will no longer be allowed to claim interest as tax-deductible starting (drumroll please) 1 October 2021. The good news is that the proposed rules exclude the following:


the main family home

new builds

property development

an owner-occupied house with flatmates

business/commercial premises

nursing homes

employee or student accommodation

social housing


Note: Interest deductions would still be allowed when you sell a taxable residential property.


Interest on loans acquired on or after 27 March 2021 can’t be claimed (with certain exceptions).


Interest deductions for pre-existing property loans acquired before 27 March 2021 would be phased at 25% per year over four years. See below.


Date interest
incurred

Percent of interest you can claim

Before 1 October 2021

100%

1 October 2021 – 31 March 2023

75%

1 April 2023 – 31 March 2024

50%

1 April 2024 – 31 March 2025

25% 

1 April 2025 onwards


0%

 

 

Property developers


Property developers will be exempt from the proposed interest deductibility rules as the “new build exemption” will continue to apply to them.


New builds


New builds will be exempt from the proposed interest deductibility rules, subject to a 5-year bright-line period. A new build is a residence that has received a Code Compliance Certificate, which confirms when the residence was added to the land.


Note: Loan interest associated with work done to improve an existing property will be non-deductible unless it costs as much as a new build, in which case it will be exempted.


Stacking approach


Under the proposed rules, a “stacking approach” will be considered when determining whether interest can be deductible or not.


Interest will not be deductible to taxpayers who allocate the loan first to residential investment properties. Interest incurred from a loan against a residential property, which was drawn down for non-residential property purposes will remain deductible.


This recognises that taxpayers could structure their loans differently to maximise the deductible interest amount.


How much interest is subject to interest deductibility rules?


Interest deductions are still allowed in loans used to buy other assets such as shares, so to avoid taxpayers structuring their residential property investments through a company to access interest deductions, anti-avoidance measures are proposed. 


Residential property percentage determines how much interest is subject to interest deductibility rules. Companies with less than 50% of total assets in residential property and Māori companies will be exempt from these rules.


Property and real estate accounting


For questions on the bright-line test, interest deductibility rules, new builds, or anything mentioned above, sing out and your Outside go-to will be in touch right away.


Remember, despite these changes, investment properties are still income-generating assets and not much has changed aside from not being able to claim certain funding costs. You can still claim all your usual operating expenses incurred in generating rental income. We know this can all be confusing, but we’re here to help you figure things out! Give us a bell or flick us a message!


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