Summary of Housing Policy Changes announced:
Here is our cheat sheet for you and some examples to how this will affect you and your properties.
First part we wanted to note was the confusion around the date 27 March 2021 and if you had just bought a property if the new rules apply. On the IRD website it clearly states - "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 meet.)".
Therefore it is not from the unconditional date nor settlement but from the date that is on the sale and purchase agreement when both parties have signed.
Bright Line Test
- Increased from 5 to 10 years
- Excludes new builds
- For property acquired on or after 27 March 2021
- Main homes and inherited property remain exempt.
- The tax is paid at your income tax rate – potentially up to 39 per cent on some or all of the profit.
- The main home exemption still exists, but they will be changing the main home exemption rules if a property has been both your main home and a rental property.
- This has already passed via a Bill
https://www.legislation.govt.nz/bill/government/2020/0273/latest/LMS352578.html
Removal of Interest Deductibility
This is significant for not only seasoned investors but anyone who owns just one or two rentals.
Also significant for families upsizing considering to keep their first home as a rental as the cash flow implications are now dramatically different.
Main points:
- Still in consultation
- Limit deductions for interest expenses on loans used to generate income from residential property.
- New builds will be exempt, and the design of the exemption will be consulted on. - Confusion around this still remains
- From 1st October, 2021
- Property purchased after 27th March 2021
- Apply to all residential property by 2025
Very simplified example of this effect:
Scenario 1:
Bob and Sally own their current home and a few years ago turned their first home into a rental.
The rental at 123 Home Street has a loan of $600,000 on it and gets $750 per week rent.
As it currently stands:
- Receive $39,000 from rental income
- Pay $5200 - rates and insurance
- Pay $15,000 in interest on their loan
- The net rental income will be $18,800
- Which at a 38% tax rate becomes = $7,144*
The changes will effect them over the next 4 years. Deductions are still claimable but will be reduced over the next four income years until it’s completely phased out by 1 April 2025.
- Starting 1 October this year, only 75% of the interest will be deductible
- For the full year ending 31 March 2023, 75 % will be deductible.
- For the year ended 31 March 2024 it will fall to 50%, and for the year ended 31 March 2025 it falls to 25%.
- And then from 1 April 2025 onwards no interest deduction will be allowed.
- So in 4 years time Bob and Sally net rental income with be $33,800
- Which at a 38% tax rate becomes = $12,844*
This reflects a $100 increase per week which will see a lot of properties no longer able to pay for themselves unless a severe spike in rents.
Scenario 2:
Bob and Sally under the same arrangements turned their home into a rental after 27 March 2021. They can deduct interest on the loan as an expense up until 30 September 2021.
- Receive $39,000 from rental income
- Pay $5200 - rates and insurance
- Pay $15,000 in interest on their loan
- From 2021 - 22 income year Bob and Sally can claim $7,500 mortgage interest as an expense (1 April 2021 until 30 September 2021).
- The net rental income will be= $26,300
- If all stays the same for 2022 - 23 year the net rental income will = $33,800
Read more here: https://www.interest.co.nz/sites/default/files/embedded_images/IR%20FACTSHEET%20Interest%20deductions.pdf
Limit Rent increase to once per year per property
- Still in consultation
- Limit rent increases to once every 12 months per rental property (rather than once every 12 months per tenancy),
- This is to help mitigate potential negative impacts on tenants from the tax changes.
- Will involve a change to the RTA
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