Rental Property Tax Changes
Posted on 02 May 2022
The Government has now passed the legislation around the removal of tax deductions on loan interest for rental properties. Previously, interest payments could be claimed as a business expense and taxed accordingly, giving property investment a tax advantage. Now, properties bought on or after the 27th March 2021 onwards will not be able to claim any tax deductions for the interest paid on the mortgages. For all existing rental properties, including holiday home rentals, the tax deductibility is being phased out over four years. Read the full report from the IRD here. This document came into effect from 30th March 2022.
Changes take effect from 1 October
Until October 2021, the old 100% interest tax deductibility is in place. Then on 1 October 2021, rental property tax deductibility reduces to 75%: you can still claim three-quarters of your interest payments as a business expense and get a tax advantage. The 75% rate remains in place until 31 March, 2023. For the following financial year (1 April 2023 to 31 March 2024), you'll be able to claim 50% of your interest payments as a business expense against your rental income. Then it drops to 25% for the next financial year (1 April 2024 to 31 March 2025). From 1 April 2025 onwards, no interest deductibility will be available. There are some exemptions, including:
- Your main home
- New builds (for 20 years)
- Commercial property
- Farmland
You can read the new legislation here.
Bright-line changes
There have also been some changes to the Bright-line rules whereby owners of new builds will be subject to the 5 year bright-line period rather than the 10 year.
What should you do?
To assess how much impact this will have on your situation, we can calculate the difference this is likely to make to your overall gains or losses in the years ahead. Our forecasts will be a good guide, but the exact situation will vary depending on several other factors, too. For instance, as interest rate deductibility reduces, you may also find that rents increase to help you meet the higher costs. However, your mortgage interest payments may also go up, if (as seems likely), interest rates increase over that time. Ideally, you should think carefully about your rental properties and whether they will still be fulfilling their role in your financial strategy. You might choose to keep them - switching from interest-only to principal-and-interest repayments could be a way to start reducing your interest costs over time. Or you could sell up and invest the proceeds somewhere else.
In summary
There are some complicated areas within this legislation and there will be additional calculations that are required when completing end of year accounts.? Simplification is bandied around but just does not seem to be something that regulators are good at. The implications of these reduced deductions plus increased tax on income over $180k could affect many taxpayers quite significantly.
Talk to Us
If you would like to talk to us about your particular situation so that we can help you to understand what these changes mean for you then please contact us.
