NZ Rental Housing Tax Changes

Will housing market tax changes impact you?

Updates on tax reform have been announced, with the government now reinstating interest deductibility for mortgage interest on residential investment properties.

This is no surprise, as the policy was campaigned upon by the new coalition government late last year.  

The government will phase in interest deductibility on mortgage interest paid on residential investment properties. Landlords will be able to claim 80% of interest expenses from 1 April 2024, moving to 100% from April 2025.

Background: Why the Change to Interest Deductibility

The previous government removed the ability of landlords to offset their interest expenses against taxes paid on rental income; the suggestion was the change would help first home buyers by making property investment less appealing. But critics highlighted several issues at the time non-deductibility was introduced, including:

• Inconsistency. The non-deductibility approach was not consistent with internationally accepted accounting guidelines. The basic principle in this case is costs incurred during the course of generating business revenues are legitimate deductions from taxable profits. Interest is a cost, so it should be deductible. Tax is then only paid based on the net income. Normally, investments in property are taxed as per other businesses. This means that rent has all expenses such as rates, insurance, interest, maintenance, and so on deducted from it – whatever is left is the taxable income.
• It was a surprise. There was no consultation, and the policy was not taken to voters before implementation.
• Logic. Higher taxes don’t usually make things less expensive, and as a country we cannot tax ourselves wealthy. True wealth comes from hard work, calculated risk, ambition, innovation, productivity, and rewarding success.

Since the change occurred, New Zealand rents had hit new record highs. This indicated landlords had inevitably passed the added cost on to tenants, along with other increased costs faced by landlords over recent years such as council rates, property insurance, and compliance costs (such as complying with so-called healthy homes regulations).

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Restoring Interest Deductibility Is Restoring Normal Tax Practice

Restoring interest deductibility is simply restoring normal tax practice, bringing New Zealand’s tax treatment in this area back into line with international standards.

Bright Line Reverts to Two Years

The so-called bright line test determines whether you pay tax on the sale of a property if you sell within a set period. The bright-line test is New Zealand’s version of a capital gains tax which only applies to property.

After increases to the bright line test over recent years, the test period has now reverted to two years. This effectively reduces the lock-in period for property investors.

Sentiment Around Landlords

The topic of landlords and property owners has sometimes been an emotional one in this country. Perhaps it’s little wonder given the high price of housing relative to average incomes in New Zealand’s main centres. Though before property investors became the latest target of the blame game, various other scapegoats have been held responsible for New Zealand’s housing woes, such as foreign buyers. When foreign buyers were banned from buying New Zealand property a couple of years ago there was no impact on house prices, which continued to climb. After that, immigration was blamed by many, but closed borders for the pandemic stopped immigration in its tracks and housing prices continued to rise for several years, only coming down more recently as interest rates had their steepest ever climb and the New Zealand economy floundered.

Property investors provide a valuable service to most tenants, and it is often overlooked that most New Zealand property investors are ‘mum and dad’ investors with one or two investment properties. In this country there are no massive corporations that own blocks of houses and apartments, which is common in places such as the United States.

Learn more: Why do cities become unaffordable

Government to Facilitate Overseas Investment in Build-To-Rent

The deductibility change was the second announcement in less than a week aimed at the rental property market.

Before this, the government announced it would amend the Overseas Investment Act to create a streamlined consent pathway that will allow foreign investors to buy into build-to-rent (“BTR”) developments. Though the ban on foreign investment into residential housing and land remains. While BTR is relatively new in New Zealand, interest is growing, writes Brent Melville at Businessdesk. “Main players at this stage include Kiwi Property Group, which is rolling out its first major BTR project at Sylvia Park next month, and Simplicity Living, which has finished construction of 159 units to date, with a further 1,097 units either under construction or at the design stage.”

Clearly, the aim is to help alleviate New Zealand’s long-running shortage of housing, which is only getting worse as the population increases due to large numbers of migrants.

The Bottom Line: Tax Changes for New Zealand Property Investors

No-one should make investment decisions based solely on tax, but this change will be good news for existing and potential New Zealand property investors.

Generally speaking, it is a little strange that high housing costs have often been regarded as a New Zealand success story – Kiwis have historically loved investing and talking about property and done very well from it. There is growing acknowledgement that’s it not all good news, and there’s also increasing acceptance the root cause of the overpriced housing in this country is our onerous planning regulations. But there’s little appetite to overhaul these regulations from politicians of any inclination, so it looks like residential real estate is set to resume its upward march in price.

Book your complimentary initial consultation with a trained professional to discuss how anything in this article relates to you. You might be able to make the most out of these changes.