Date: 12th April 2021
If you are a property investor or landlord, you should be aware of the recent changes to residential property law that have an impact on your income tax. Below we’ve outlined the key points. If you have any questions, please do not hesitate to contact us.
If you sell a residential property you have owned for less than a set number of years, depending on when you purchased the property, you may have to pay income tax on any profit you have made in property value. This bright-line property rule also applies to any New Zealand tax residents who buy overseas residential properties.
As from 27 March 2021 there will be an extension of the bright-line test from 5 years to 10 years, excluding new builds. Inherited property and property that is used as the owner’s main home is exempt from this tax.
The below flow chart will help you to identify how the new rules will work:
Any residential property that has been used as the owner’s main home for the entire time they owned it will be exempt from the bright-line test.
Any property purchased on or after 27 March 2021, including new builds, will be subject to a ‘change-of-use’ rule. This will affect the way tax is calculated if the property was not used as the owner’s main home for more than 12 months at a time. If the property was not the owner’s main home for less than 12 months at a time, for example if the owner takes a few months to move into a property, these days will be treated as main home days.
The change-of-use rule will apply if the property is not the owner’s main home for more than 12 months at a time. In this case the owner will be required to pay a proportion of the profit made through the property increasing in value. This change-of-use rule only applies to property purchased on or after 27 March 2021.
Currently, when owners of residential investment property calculate their taxable income they can deduct interest on loans that relate to the income from those properties (claimed as an expense). This reduces the tax they need to pay.
The Government has agreed to change these rules and will consult on the detail. The legislation will apply from 1 October 2021. For properties purchased on or after 27 March 2021 it will not be possible to deduct interest on loans as an expense on income tax. For properties purchased before 27 March 2021, interest on loans can still be deducted as an expense, however this will be phased out over the next 4 income tax years. If you have a standard balance date the proposed change will be phased as follows:
These changes will affect a number of our clients, including those with holiday rental properties. If you would like to further understand the implications of these changes then please give us a call.
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