GOVERNMENT RENTAL PROPERTY TAX CHANGES - UPDATED

WEBINAR:

SUMMARY OF CHANGES

Changes announced in April 2021 by the government: 

• ​Bright-line test increased to 10 years (except for new-builds, which remain at 5 years); more info here
• amending the "main home" exemption which would require tax to be paid on gains
  made for periods the property is not used as the owner’s main home (a "change of use" rule).
• not allowing property owners to claim interest on loans used for residential properties as an expense against their income from those properties. This will start from 1 October 2021, and will be phased in over 4 years for existing properties. There will be an exemption for newly built homes. More info here
• Ring-fencing rules applied to short-stay accommodation e.g Airbnb

​Note that this law is very much "being made up as they go along" so lots of things are unknown, or not even decided on yet.

HOW DOES THIS AFFECT ME?

At present, when you receive rents, you can offset expenses against that rental income to reduce the taxable profit.  A big part of this is interest paid on the rental mortgage/s.

If the expenses are more than the income (a "loss"), the Ring Fencing laws mean the loss can't offset non-rental income, and the loss instead is carried forward to the next year. If you have two or more rentals, the loss from one property can offset the profit from another (depending on how your affairs are structured).

However, under these new laws, the interest deduction will (over 4 years) be reduced, then finally removed.  Rental properties will make more profit, and for almost everyone: there will be a lot of tax to pay.

And of course, if you can't claim the expenses on interest, but still have to pay it... where does the money come from? You have to raise the rent.

WHAT SHOULD I DO?

1. Don't panic! Most investors have losses from FY20 and FY21, which can be carried forward to offset future income. This would defer the tax impact for a couple of years, giving you time to make changes.
2. Consider selling your existing rental and getting a "new build property." According to the Labour Party website, "If you invest in a new build property, you will be exempt from changes to the bright-line test and interest deductibility policy."
3. Look at your budget. Expect that around March 2023 you will have 25% more to pay, then 50% more the following year, then 75% more, then 100% more for the period starting April 2025. You might end up being a provisional tax payer in a couple of years time.
4. Look at raising the rents to help offset the reduction in interest expense that you can claim.
5. Consider selling heavily-debt laden properties. Look for something more cash-flow neutral or positive. Check with us first to make sure you are not caught by the various tax laws.
6. Check whether it is time for a restructure e.g. a change of shareholdings or sale or properties to a new entity etc: contact us. Just be aware that if something is done primarily for tax benefits, it is viewed by IRD as tax avoidance. Also be aware that in some cases, a restructure can restart Brightline. Note however that the new proposed laws are also offering "roll-over" relief ie where you restructure into an entity with the same ownership, it is not viewed as a restart of the Brightline test.
7. Worth looking into commercial property, as it is not subject to these new rules.
8. Mixed commercial ie commercial with a flat, may be worth looking into as well; you would likely not be able to claim interest on the accommodation portion but could on the commercial portion, so would need to "do the numbers" to see if it adds up.
9. Also definitely worth getting into short-stay accommodation, because it is not subject to these interest deduction limitations if a Mixed Use Asset - see this link for more info. (Talk to StayHub about how it could work; contact us to discuss your property/ies)
10. Talk to your financial advisor about boardinghouse accommodation e.g. near large hospitals and the universities, there is a demand for this.

FAQ

Q: So what can I claim?
A: You can claim all the usual costs e.g. property management, repairs & maintenance, rates, insurance, legal etc. Re interest: It depends on timing. The following chart shows how much you can claim, depending on when you "acquired" the property:

Q: How do I work out the tax impact?
A: The calculator below will help you work out the taxable income. The exact tax depends on many things e.g. owned personally or via a trust or LTC? How much wages you receive etc etc.​ Note that this calculator assumes you already own/have "acquired" the investment property/ies.

interest-deduction-calculator.xls
File Size:	52 kb
File Type:	xls

Download File

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Q: My rental was a new build. Does it still qualify as a new build under these laws?
A: Probably not. 

Q: Is short-stay accommodation caught by the new interest deductibility limitations?
A: It would appear that mixed-use-assets (MUAs) - which are holiday homes partly used personally and which are vacant for at least 62 days in a year - are not caught by these new rules, but IRD specify this (at 2.33) "the Government considers it important that where a residential property could be used to provide long-term rental accommodation, the income tax treatment is the same whether the property is used to provide long-term rental accommodation or short-stay accommodation. Any income tax advantage provided for properties used for short-stay accommodation could reduce effective housing supply." In other words, it would seem that yes, it is caught. Just remember that this is all "draft" at this stage, so not actual law.

Q: When did I "acquire" my rental property?
A: For tax purposes, a property is generally acquired on the date a binding sale and purchase agreement is entered into (even if some conditions still need to be met). More info here. Note that for the purposes of the changes outlined here, a property acquired on or after 27 March 2021 will be treated as having been acquired before 27 March 2021, if the purchase was the result of an offer the purchaser made on or before 23 March 2021 that cannot be withdrawn before 27 March 2021.
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Q: My property sale will be taxable due to the Bright-Line Test (BLT).  Can I claim the interest costs in that scenario?
A: No one knows. IRD say "The Government will consult on the detail of these proposals. Consultation will cover an exemption for new builds acquired as a residential investment property, and whether all people who are taxed on the sale of a property (for example under the bright-line tests) should be able to deduct their interest expense at the time of the sale."

Q: How do the "main home" changes work?
A: Actually, it reminds us a bit of how CGT works in Aussie. There is a great explanation at Stuff together with an example.  (Thanks Stuff.co.nz!)