What are the new tax deductibility rules on rental properties?

14 January 2024

Tax deductibility rules

Owning a rental property in New Zealand can be a lucrative investment, but understanding the ever-changing tax landscape is crucial for maximising your gains. In 2021, the Labour government introduced significant changes to the deductibility of interest expenses incurred on residential rental properties in an effort to cool the overheated housing market.    

The new incoming National coalition government is now in the process of implementing changes designed to bring some balance back into the tax deductibility rules associated with the property market.

A brief rewind. 

Prior to 2021, landlords could deduct all interest expenses associated with their rental properties against their taxable income. This helped fuel an investment boom in the housing market but also contributed to rising house prices and concerns about affordability and accessibility to the market by first-home buyers.

To address these issues, the 2020 Labour government implemented a phased approach to limiting interest deductibility on rental property owners, which included:

● Rental properties acquired on or after 27 March 2021: No interest deduction is allowed.

● Rental properties acquired before 27 March 2021: Deductibility to be gradually phased out between 1 October 2021 and 31 March 2025. Starting from 1 October 2021, 25% of the interest was disallowed, increasing by 25% each year until full deductibility is phased out in 2025.

Some exemptions and exclusions. 

The policy, however, recognised specific scenarios where interest deductibility would remain, including:

● New builds: Interest on loans for constructing new rental properties completed after 27 March 2020 remains deductible until the property is first rented.

● Land development: Interest expenses incurred during the development or subdivision of land for residential purposes are deductible.

● Boarding establishments: Properties with 10 or more rooms and shared living spaces classified as boarding establishments are exempt from the interest deductibility restrictions.

New tax deductibility rules.

In October 2023, the new National lead government proposed further amendments to the interest deductibility rules, aiming for a fairer and more balanced housing market.

A phased approach is being planned to restore mortgage interest deductibility for rental properties with a 60 per cent deduction in the 2023/24 year, 80 per cent in 2024/25 year, and 100 per cent in the 2025/26 year.

The Minister of Finance, Nicola Willis, announced in March 2024 the final details of the tax changes regarding interest deductibility as follows:

● For the 2023/24 Financial Year: Landlords will be able to claim a 60% deduction on their interest expenses.

● From April 1, 2024: This deduction will increase to 80%.

● From April 1, 2025: Landlords will be entitled to claim 100% of their interest expenses as a deduction.

These changes mark a significant shift from the government's initial indications, particularly concerning the ability to claim expenses retrospectively. The phased approach aims to provide landlords with gradual relief on their interest expenses, aligning with the broader goal of encouraging investment in the housing market while ensuring fairness in the tax system.

Bright-line test changes.

Currently, for properties purchased after March 27, 2021, the bright-line test is 10 years, but only 5 years are needed for new builds. For properties bought between March 29 2018, and March 27 2021, the bright-line test is 5 years.

National's pre-election campaigning proposed that the bright-line period be rolled back to 2 years (subject to coalition partners agreeing), making it as early as July 2024. This means that any property acquired before July 2022 may no longer be caught by the bright-line tax rules.

Staying informed.

With the tax landscape constantly evolving, it's crucial for landlords and property investors to stay informed, and we recommend:

● Seeking professional advice: Consult a qualified rental property management expert, accountant or tax advisor to help you navigate the complexities of the new rules and optimise your tax and investment strategies.

● Maintain accurate records: Meticulously document your rental income, expenses, and loan details to ensure compliance and facilitate any necessary claims.

● Monitor legislative updates: Stay abreast of any changes to the tax rules by regularly checking the property interest rules on the Inland Revenue Department website.

● Stay abreast with relevant industry associations like New Zealand Property Investors' Federation (NZPIF).

Owning rental properties in New Zealand can be a rewarding endeavour, but navigating the tax implications requires knowledge and adaptability. By understanding the current and upcoming changes to interest deductibility, you can make informed decisions and ensure your rental investment continues to thrive.

As with all tax legislation, the devil is in the details, and you should clarify your situation with a qualified property manager or accountant or read the IRD rules.

Hammond and Co is a specialist property management company based in Auckland. Hammond and Co’s purpose is to navigate the increasing complexities of long-term property rentals, delivering optimum outcomes for owners and tenants through our tailored property management approach. Contact Hammond & Co for expert advice on getting the most from your property investments.

 

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Gina Colcord

Business Manager

Gina Colcord is an experienced Business Manager in property management with over 15 years of experience. She has worked across various property types and has been recognised for her achievements, including being a finalist for the REINZ Business Development Manager Award in 2020 and previously winning the LJ Hooker National Award for Best Property Investment Management in NZ.

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