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Part 2 – Investment property: law changes and tips for maximising returns – New builds.

Part 1 of our blog on investment property changes highlighted the recent law changes and provided a few tips on how to make the most out of your investment properties. Part 2 looks at new builds and commercial property and why they shouldn’t be overlooked as options.

Considering new builds.

A new build may be beneficial to your property portfolio if you don’t know how long you intend to hold a property. Maintenance and repair costs can be lower, but it’s been proposed that the bright-line test will remain at five years for new builds. As long as the numbers make sense and the property can pay for itself, a new build property can be a good addition to your portfolio.

While we still don’t have clarity around new builds and exact interest deductions, consultation is still ongoing about the exact definition of what a new build is. Inland Revenue is still consulting to determine how the new legislation will deal with various situations.

If you are looking at the residential option “One thing we would warn is to get structure advice early on before buying the property as due to the bright-line test you cannot restructure after purchase without a tax consequence. Also, there may be alternatives that will enable an interest deduction against another business venture rather than the property investment.”

Consider Commercial Property.

Glynis Carter, Partner, Monteck Carter, says “Aside from considering new builds, investors should think about commercial property as well, there is full interest deductibility, no bright-line, avoids the strict tenancy rules and depreciation is able to be claimed on the building. It may be that we will see Mum & Dad investors forming partnerships to buy commercial buildings as an alternative to the residential option.”

If you are looking at the residential option “One thing we would warn is to get structure advice early on before buying the property as due to the bright-line test you cannot restructure after purchase without a tax consequence. Also, there may be alternatives that will enable an interest deduction against another business venture rather than the property investment.”

Amendments to the definition of business premises.

A proposed amendment to the legislation will confirm that short-term accommodation is treated as a residential dwelling not a “business premise” as some previously claimed.  Claiming they are business premises has allowed some taxpayers who operate Airbnb-type accommodation to avoid the Brightline and Loss ring-fencing rules.  The proposed amendment will confirm that if a property is a dwelling and is not lived in by the owners, it falls within both the Brightline and the Loss ring-fencing rules, and we suspect going forward the new interest deductibility rules when these are confirmed and passed by parliament.

There is a bit of an anomaly here in that for GST purposes an Airbnb is treated as commercial premises.  It is not unusual to have different treatments for income tax or GST, and this looks like it will be one of them.

This does not appear to include motels or B&B-type properties as they are either not dwellings or they are lived in partly by the owners.

Karen Tobeck, Partner, Monteck Carter, stresses that these rules are only proposed currently but this makes it really important to look at structure prior to purchasing any property going forward.

To discuss any aspect of property investing or your rental property portfolio further, contact one of our team today. We have specialists in this area and are happy to help.

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