The tax system used to allow property investors to deduct interest expenditure for residential rental property even if gains made on the sale were not taxed, that’s why many property investors put their money into residential properties expecting a large capital gain when they sell. However, the new interest limitation rules have limited the deductibility of interest expenses made from 1 October 2021 and many are wondering if this will be a blow to their bottom line.
New builds
Under the new law, new builds receive significant tax advantages as these properties can still claim their interest for 20 years after their code compliance certificate is issued. To illustrate, a new build with a $1 million mortgage with a 4% interest rate and 33% marginal tax rate will receive $13,200 of tax benefits a year more than the same existing property!
Existing properties
Existing properties will be taxed like there isn’t any mortgage even if there is a mortgage to pay (however this is currently in the phase out method). Unfortunately, even if the property is negatively geared, the tax must still be paid. However, these properties can still get the new build tax exemption if renovated or converted.
Social housing incentives
Meanwhile, there are significant incentives for properties rented out as social housing. This is a way to help cover the increasing waitlist for state-subsidised homes. Property rented out to Kainga Ora or a Registered Community Housing Provider can continue to deduct interest costs.
Multi-tenancy dwellings
For a home with two existing dwellings on the site, part of the interest can no longer be claimed as a tax deduction unless it comes under the new build exemption. This means that if one dwelling is converted into two dwellings, both will be considered new builds and can claim tax benefits. Often, a two-story building is converted into two separate dwellings on each floor.
The new tax rules also created a new property type called “boarding establishment.” If a property has 10 or more rooms rented out individually and the rooms are not self-contained, it can claim tax benefits. Note though that this is different from what is considered a boarding house under the Residential Tenancies Act (RTA) and other council bylaws, which is defined as a property with six or more rooms with separate agreements. This means a property can be considered a boarding house for tenancy purposes but not for tax purposes.
Relocation
If you relocate a house onto a piece of land, it can be considered a new build as long as it gets a new Code Compliance Certificate from the Council. The property will be able to claim tax benefits. However, there must be a valid reason for the relocation such as making room for a minor dwelling.
Under the new rules, the buy-and-hold and renovation strategies can still get you access to tax incentives. If you buy-and-hold, you can claim for the next 20 years and if you renovate, you can claim for a new build or increase the rent to compensate for the tax.
Those are just some of the details of the new property tax rules! If you want us to dive right into the specifics, give us a buzz and we’ll give you a blow-by-blow account and explain how these changes can impact you. Let’s find some ways to save you some cash!
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