GOVERNMENT RENTAL PROPERTY TAX CHANGES 2021
SUMMARY OF CHANGES
Changes announced January 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 was very much “being made up as they go along” so at the time of announcement, lots of things were unknown, or not decided on. Subsequently, IRD have clarified most questions and rewritten some poorly-worded tax law.
HOW DOES THIS AFFECT ME?
Up until 27 March 2021, when you received rents, you could offset all interest paid on the rental property mortgage against that rental income to reduce the taxable profit. This is what’s changed: Unless the property meets certain rules, interest claims are either zero or are being phased out over 4 years.
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 more 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.
Unless the property is rented to a CHP, used for emergency or transitional housing, or is a new build, then interest cannot be claimed. More info here
WHAT SHOULD I DO?
- 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.
- 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.”
- 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.
- Look at raising the rents to help offset the reduction in interest expense that you can claim.
- 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.
- 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.
- Worth looking into commercial property, as it is not subject to these new rules.
- Also definitely worth getting into short-stay accommodation, because it is not subject to the interest deduction limitations – although other restrictive rules apply. (Talk to StayHub about how it could work; contact us to discuss your property/ies)
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:
2024 Update: The government has advised that from 1 July 2024, interest deductibility will be increased to 60% (from 50%), then to 80% the following year, then to 100% in the following year.
Q: My rental was a new build. Does it still qualify as a new build under these laws?
A: If it is already built, no. If construction is not complete: IRD have not said. We have to wait and see as they figure out the details.
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.
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.”