As you might be aware, the government has recently announced some changes to the housing policy in New Zealand.
These changes have been introduced in an attempt to address the current housing crisis and the supply and demand for residential properties. Particularly affected by the introduction of these changes are those who currently own investment properties.
What are the changes?
Firstly, there has been an extension of the bright-line test – a rule that requires people who sell a residential property to pay income tax on any profit. Previously, the bright-line test has required that if you sell your residential property within 5 years of ownership, you would need to pay capital gains tax on any profit made, but this has now been increased to 10 years of ownership.
This extension doesn’t apply to what are considered “new builds” however, but the definition of what a “new build” is has not been made clear just yet.
Alongside this, there has also been a modification of the main home exemption rule – the rule that prevents the house you live in being taxed. With this modification, if you stop living in your main home for a period of time, any gains made in that proportion of time will be taxed.
Secondly, from October 1st this year, there will be a removal of interest deductibility for residential investment. This will initially apply to properties purchased after 27th March 2021, but will apply to all residential properties by 2025 – again, new builds may be excluded from this.
So if you purchased a property before 27th March 2021, you are still able to claim interest on pre-existing loans as an expense against your residential property income, but this is going to be phased out over the next five years.
What does this mean for you?
If you’re planning to move into a new home and rent out your previous property, you’ll need to consider whether you will be likely to sell your previous home within the next 10 years.
If you need to sell a property urgently, there’s not a lot to be done regarding the bright-line test and tax to be paid. But if you are able to hold on to it for a longer period of time, this might be a good option.
When you’re purchasing a property, you’ll need to have the expectation that you won’t be selling it within the next 10 years, or if you do, tax will need to be paid on any capital gain. If you’re using the property for rental income purposes, you’ll need to consider the tax implications and factor in the cost of these changes.
If you’re considering purchasing an investment property, it might be a good idea to purchase a new build to bypass the main effects of the changes.
Many investors are taking a good look at their properties and weighing up the pros and cons in light of these changes. If you’d like to take a look at your options, or get a better idea of your rental financial situation, our expert property accountants can help. Get in touch with us today!