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Government's Rental Property Interest Deductibility Details Released

The Government has announced the design details of the mortgage interest tax deductibility, which affects property investors and ultimately tenants.

“The NZ Property Investors’ Federation (NZPIF) is pleased that the details have been released. The definition of a “new build” property, is one that has received its code of compliance after 27 March, and interest deductions will still be possible for the next 20 years irrespective of the ownership. This is a step in the right direction.” says Sharon Cullwick, NZPIF executive officer. “However, NZPIF does not see how this will help tenants of older properties, who will ultimately have to pay for the extra costs put on landlords. It also will not help tenants who are saving for their first home.”

In March this year, the Government brought in radical changes for property investors, treating them differently from any other business by removing the ability to deduct mortgage interest as a legitimate business expense. MBIE, IRD, accountants and tax experts do not support these changes.

Finance Minister Grant Robertson said, "The Government's goal is to encourage more sustainable house prices, by dampening investor demand for existing housing stock to improve affordability for first-home buyers." It is interesting to note that since this announcement, house prices have not significantly changed.

Today's details identified a 'new build' more precisely and an additional supplementary order paper was released that proposes a five-year new build bright-line test for these compared to ten years for older properties. This allows a newly built property to be sold after 5 years without any bright-line tax implications.

A number of exemptions from application of the new law have been announced. Properties purpose-built for rental homes and owner-occupier properties are exempt. Kainga Ora and many community housing providers will also generally be exempt from these rules.

However, NZPIF is concerned that residential investment properties capable of being used for long-term accommodation, such as Air BNB properties, would be subject to the proposed rules. In addition, if significant work is undertaken on an existing property that does not require a new code of compliance, it will not qualify to be exempt.

Cullwick says it is expected that some rental home providers will have to increase rents to cover this additional tax, or they may end up selling properties, thus reducing the availability of rental homes.

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