Threefold

June: Regulatory Update 

Navigating the intricacies of New Zealand’s property tax laws can be challenging, especially with the upcoming changes to the bright-line property rule and rental income tax deductibility that will come into force from July 1. These regulations significantly impact property owners and investors, and understanding the nuances is crucial for effective financial planning.

The bright-line property rule

Key takeaway: The bright-line property rule is changing so that the test will now only be applied if property investors on-sell a property within two-years, rather than the current 10-years for residential property (or five-years for new builds).

The bright-line property rule is a tool used by the New Zealand government to curb speculative investment in residential property. Initially introduced in 2015, it mandates that any profit made from selling a residential property owned outside of the family home within a specified period must be taxed.

Currently, for residential properties bought between 29 March 2018 and 26 March 2021, the bright-line property rule is applied if the property is sold within five years of buying it.

If a property was bought on or after 27 March 2021, the bright-line property rule applies if the property is sold within five years for qualifying new builds or within 10 years for other residential property. The only exceptions are the family home, inherited properties, properties transferred as part of a relationship property settlement, farmland and business premises.

However, from 1 July 2024, the bright-line property rule will only apply if the property is on-sold within two years of purchase. This rollback aims to ease the tax burden on property owners, which was potentially significant as any profit made on the sale of the house would be taxed at the owner’s personal tax rate.

For example, if an investor made $200,000 on the sale of the house within the period the bright line test applied, it would likely push the investor into the highest tax bracket, with the impact being they would potentially have to pay 38% income tax on the sale.

For investors who purchased properties when interest rates were historically low and who are now feeling the pressure of the rise in rates, these changes may serve as a welcome relief for those looking to step back from the property market.

For owner-occupiers, the changes in these rules will have minimal direct impact since the bright-line test does not apply to the sale of the family home, ensuring that homeowners are not penalised for moving or upgrading their residence. 

Non-directly however, these changes may lead to more properties coming onto the market as some investors decide to exit the market more quickly. Although, on the flipside, the changes are likely to also reduce the perceived barriers to entry for investors looking to build their portfolios, as taxes are reduced on short-term property investments.

Changes to Rental Income Tax Deductibility 

The other major property tax change coming in on 1 July 2024 relates to rental income tax deductibility, which impacts a landlords’ ability to deduct interest expenses on loans used to purchase residential rental properties.

Previously, landlords could fully deduct these interest expenses, reducing their taxable income and thus their overall tax liability but the ability to deduct these legitimate business expenses was phased out on
1 October 2021.

However, starting July 1, 2024, the current government has announced that the deductibility of interest expenses on loans for residential rental properties will be reinstated through a phased approach. For the year ended 31 March 2025, 80% of the interest paid in relation to a residential rental property will be able to be deducted, with 100% interest deduction available from 31 March 2026.

At its highest level, this change will simplify the tax system for property investors and allow landlords to once again deduct all business related expenses – including interest – on their rental properties, which in turn should help increase cash flow.

Looking ahead

If you are a residential property investor, or are thinking about entering the market, it is important to understand the impact these changes will have on you.

Our team are here to help and can offer expert advice around how best to structure your loans to create tax efficiencies and improve your cash flow.  If you are interested in finding out more, click here to book a free financial review with one of our specialist mortgage advisers today or email clientservices@threefold.co.nz with the subject ‘property portfolio review’.

The content of this article should not be taken as financial advice, or a recommendation of any financial product. Threefold is not liable or responsible for any information, omissions, or errors present. We recommend seeking advice from a qualified financial adviser before taking any action.