New Zealand witnesses residential property tax changes (again)

  • Removing interest deductions for residential rentals
  • Extending the Bright-Line Test from 5 years to 10 years, and other changes for the main home exemption.
  • Investing $3.8 billion into housing acceleration funds
  • Loosening income and price caps for first time buyers who plan on utilizing government assistance programs

Removal of interest deductibility

Starting from 1 October 2021, the government proposes to remove interest deductibility on residential rental properties acquired on or after 27 March 2021. Residential rental properties acquired prior to 27 March 2021 are still entitled to interest deductions but at a reduced rate year on year until it is 0% from 31 March 2025 (for default balance date). This means landlords will not be able to claim interest deductions on residential rental properties after 31 March 2025.

Bright Line Test

The government proposes to extend the bright line test from 5 years to 10 years for pre-existing properties with the exclusion of new builds which can still apply the 5 year bright line period. It is proposed to be effective for properties which are contracted for sales and purchase from 27 March 2021.

Other measures

In addition to these two changes, there are also two new non-tax measures being put into practice that will help first home buyers while also boosting supply. First, the income cap for first home buyers will increase from $85,000 to $95,000 for single buyers and from $130,000 to $150,000 where there are multiple buyers.

Other comment

Unfortunately, tax rule changes and tightened mortgage lending have resulted in a shortage of rentals. For landlords who are excessively geared may leave the market due to these tax changes which may put further pressure on rent levels. Based on recent news, Government will consider addressing rental hikes if it happens.

Final notes

If you own a residential property, it is strongly recommend to seek advice on the tax consequences from these tax changes to your property portfolio once the final legislation is enacted. The added complexity of these rules to the current law means it may create higher risk of unintended errors.

Need help with your taxes or want to know more about the New Zealand Tax System?

NZ International Tax & Property Advisors is a one-stop Chartered Accountant firm providing international tax, property tax & consulting, accounting and training services to locals, migrants/expats and businesses. Their A-team has over ten years of experience in specialising in cross border tax for migrants and expats, taxation on land transactions, IRD disputes and resolutions and small and medium business tax.

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