The Government’s decision to delay the phasing out of the interest limitation rule for residential property investors comes as disappointing news for many in the real estate sector. Originally slated for implementation in the current tax year, the phase-out will now commence in the year ending March 31, 2025. This rule restricts investors from deducting mortgage interest as an expense for tax purposes, with exceptions for new builds.
Under the existing law, interest deductions for properties purchased after March 27, 2021, are disallowed. For properties acquired before this date, a 50% interest deduction is permitted in the current tax year, ending this month. The initial agreement between National and Act aimed to allow a 60% interest deduction in the current tax year, potentially leading to tax refunds for some investors. However, due to revenue implications and economic challenges, the Government has opted to maintain the current rules for this tax year.
Act leader and Associate Finance Minister David Seymour expressed understanding of the decision, emphasizing the avoidance of retroactive alterations. He focused on the benefits for investors and renters, highlighting the challenges faced by landlords and the potential impact on rental costs.
However, Labour’s finance spokeswoman Barbara Edmonds criticized the Government for neglecting first-home buyers and expressed concerns about enduring repercussions. She questioned the fairness of the decision and its impact on future generations, suggesting that landlords would benefit disproportionately.
The amendment to the interest limitation rule will be included in the Taxation (Annual Rates for 2023–24, Multinational Tax and Remedial Matters) Bill, presently under review by a select committee and scheduled for approval by the end of the month. Act had advocated for the complete removal of the interest limitation rule in a single action during their pre-election campaign, emphasizing the need for an environment conducive to investment and development.
The delay in phasing out the interest limitation rule presents challenges and uncertainties for property investors and tenants alike. As the legislative landscape evolves, staying informed and seeking expert advice will be crucial for navigating these changes effectively.
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