The news of late has been rife with stories of high inflation, the rising cost of living, difficulties in securing finance and rising interest rates. Unfortunately, we don’t have any good news to add here either.
Basically, it’s a “Yeah” to deductible interest if you buy a new property that was completed after 27 March 2020, and a “Nah” if you buy an investment property that was built before then. It’s a “Sort of yeah nah” if you already owned an investment property with a mortgage on 27 March 2021.
For decades residential property investment has been a cornerstone to an investment portfolio for New Zealanders in saving for their future. New Zealand is one of the very few countries in the world that does not have a strict capital gains tax.
In early 2021 the government announced a range of measures to our tax system in an attempt to slow down runaway house prices. These measures included some changes to counter what is seen as favourable treatment for residential housing investors.
Residential rental investments previously came with the promise of tax-free capital gains, with the ability to deduct the holding costs against income derived. This meant investors could deduct mortgage interest from their taxes.
In what is arguably the most controversial tax changes in recent years, a gradual denial of interest deductions on monies borrowed to purchase residential property became effective 27 March 2021.
Since October last year, you can no longer deduct any interest on properties purchased after 27 March 2021. If you bought your property before 27 March 2021, your ability to deduct interest will reduce over four years like this:
Up to 30 September 2021 - 100%
1 October 2021 to 31 March 2023 - 75%
1 April 2023 to 31 March 2024 - 50%
1 April 2024 to 31 March 2025 - 25%
After 1 April 2025 - 0%
And remember: these deduction denial rules also apply to residential properties used as Airbnbs.
But wait – you still might be able to deduct interest. There are various exemptions available, so the rules may not apply to your investment.
The most significant exemption is that the denial rules do not apply to “new builds”. Your property counts as a new build if it got its code of compliance certificate on or after 27 March 2020. You can deduct interest for up to 20 years from the date code of compliance is issued. This exemption will apply to both the initial buyer and any subsequent owners within the 20-year period.
Exemptions are also available for other types of residential properties such as farmhouses, retirement villages, hotels, hospitals, and others.
It is important to note these rules refer to the original financing on a property. If the property is refinanced for the same amount, then the interest will remain deductible. But any new financing will not be deductible at all.
With the rules now in play, you may find that we request more information than usual for preparing your tax returns – particularly in relation to borrowings on your residential investments.
If you are at all concerned about the impact of these new rules, reach out to your Oxford Edge advisor to discuss your particular situation.