Chartered Accountants: What the new tax rules could mean for mixed-use properties

It’s no surprise that the Government is still debating proposed changes around tax rules for investment properties (it’s a hefty topic to cover). As we’ve explained in a previous post, the proposed changes could deprive you of the opportunity to claim the interest on your loan payments as a tax deduction.

 

Assuming you’re also keen to avoid getting stung by the big ole CGT (Capital Gains Tax), you will also want to hold your investment property for at least five years (if purchased before27 March 2021) or 10 years (if purchased after that date).

 

Note that the planned changes will not apply to commercial investment properties, so shops, offices, warehouses and factories will still be able to claim interest on loans as a tax-deductible expense.

 

However, these developments leave us scratching our heads over the status of mixed-use properties.

 

First, what are mixed-use properties?

 

As our urban environments change, we see a continuous increase in buildings or structures with a mixture of residential and commercial space. These are the shops we see around the corner, office spaces, showrooms or even warehouses with residential flats above them.

 

People starting up new businesses often prefer these live/work arrangements, not only because of their convenience but also because it allows them to defer homeownership while they build their businesses.

 

Mixed-use properties: Are they residential or commercial?

 

According to Inland Revenue, where a property has an element of both, it will be classified based on how much of the land area or floor area is “predominantly used” for residential or commercial activities. “Predominant use” means more than 50% for income tax purposes.

 

A property will be classified as all residential or all commercial based on its predominant use, even if it is used both residentially and commercially. For more information about the bright-line test, click here.

Or give our very own property guru, Tom, a bell.

 

How will the proposed tax rule changes affect mixed-use properties?

 

The Government has yet to decide on how the new interest deductibility rules will affect such properties but it could:

 

  • adopt the “predominant use” concept;
  • use apportionment based on floor area or     rental income to determine deductibility;
  • or just exempt the entire property.

 

In the meantime, we’re playing the “wait and see and cross our fingers that the taxman won’t come knocking for some more coin” game!

 

If you have any questions, flick us a quick email or give us abuzz—our team will be more than happy to talk to you about it!

 

Your Outside Team, Ruby and Rocket

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