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Residential property tax changes: How much will you pay?

In a bid to ease New Zealand’s housing crisis, the Government has introduced new legislation that will impact current owners of residential investment property and new purchases made on or after 27 March 2021:

  • An extension of the bright-line test from five to ten years
  • A new change of use rule
  • Removal of interest deductions from residential property

Impact on current owners of residential investment property

A five year bright-line test will continue to apply to property purchased before 27 March 2021. Existing exemptions from the bright-line test for a ‘main home’ continue to be available for properties that are the main home of the person or a beneficiary of a trust that owns the property. The new ‘change of use’ rules will not apply to these properties, and the main home exemption will continue to apply in full where a property has predominantly been used as a main home over the time it has been owned.

However, interest deductions will be gradually phased out for current residential investment properties from 1 October 2021 and over the following four income years. As taxable income is calculated based on income minus allowable deductions, where allowable interest deductions are limited by the application of the new rules, property investors may find that their taxable income (and consequently their tax bill) will increase annually over this period. No interest deduction will be available after 1 October 2021 on debt raised after 27 March 2021 in relation to existing residential investment property (for example, maintenance, capital expenditure etc).

Property owners should be aware that additional tax will need to be met from their cash resources (or by raising debt if necessary). Obligations or entitlements for student loan repayments, child support payments, or working for families may also be affected by this change.

Residential investment property purchased on or after 27 March 2021

These properties will be subject to taxation under the bright-line test if they are sold within 10 years. A five year bright-line test will apply to property which is designated a ‘new build’.

Properties purchased on or after 27 March will be subject to new ‘change of use’ rules. If a property has not been used as a ‘main home’ for more than 12 months at a time, it will be subject to ‘change of use’ and the owner will be required to pay income tax on a proportion of the profit made through the property increasing in value.

For residential investment rental properties purchased after 27 March 2021, interest deductions will be available up until 1 October 2021, and no further deduction will be available after that date.

Property developers who pay tax on the sale of property will not be affected by this change, and will can continue to claim deductions for interest expenses incurred in deriving taxable income from their development activities.

Changes relating to interest deductibility are still under consultation, and could arise until the legislative process is complete.

It’s important to note that this information above is does not address all details of application or exemptions. Your Grant Thornton advisor can help you understand how these changes will affect any residential properties you own and keep you advised of any updates which may affect you.