The government has announced significant changes that will impact residential property investors.
The Bright Line Test will be extended to ten years, a move that was widely anticipated. In a surprise move, the government will remove interest deductibility on residential rental property mortgages.
Brightline Test Extension
The existing bright line test will be extended from five years to ten years. New builds will be exempt from the brightline test.
Inherited properties and those which have been the owner’s main home for the entire time they owned it will continue to be exempt from all bright-line tests.
Property acquired on or after Saturday 27 March 2021 will be subject to the new rules.
Interest Deductibility
The government has announced that property investors will no longer be able to deduct interest from their taxable income. The Minister of Revenue has said that this change is designed to impact leveraging of existing properties and to assist first home buyers.
Property developers who pay income tax on the sale of properties will still be able to claim interest as an expense.
For existing investors, the interest on any borrowings can still be claimed but will be phased out over the next four income years. More information is available on the IRD website.
If an investor has made an offer on a property prior to Saturday 27 March 2021, but the offer is accepted after this date, and the investor cannot withdraw their offer before that date, the property will be treated as if it was acquired prior to 27 March 2021.
The Government will consult on the detail of the proposal Cabinet has agreed to, and legislation will be introduced thereafter.
Consultation will look at an exemption for new builds acquired as a residential investment property, and consider whether all people who are taxed on the sale of a property (for example under the bright-line test) should be able to deduct their interest expense at the time of the sale.
A synopsis of all the announcements made regarding property can be found here. The parliamentary supplementary order paper to support the legislative changes can be viewed by clicking here.
These legislative changes are significant and clients should contact us for more information.