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Interest limitation update

Anna
Anna
1 October 2021

Photo by Adana Hulett on Unsplash

The Government unveiled more information on plans that would bar landlords from deducting the interest costs of their mortgage from their tax bill.

In March, the Government has released plans to limit the deductibility of interest costs for landlords. Broadly speaking, residential investors impacted by the rule change will be able to claim 75% of their mortgage interest charges against their taxable income from October 1, 2021, 50% during the 2024 tax year, 25% in the tax year after that and then 0% going forward.

The Supplementary Order Paper was released on September 28, providing further details about the proposed change.

It's important to remember that even though more details have been released, these are still not final. The proposal has to go through parliamentary consideration and may change before it is passed into law by March 2022.

New builds

The Government has decided to exempt new builds for 20 years from the new tax rules. This means that property investors can continue claiming interest tax deductions on properties. This applies to properties that received their code compliance certificate (CCC) after March 27, 2020.

"New" homes can keep their exempt status regardless of who owns them. This exemption is transferable and applies to both the initial purchaser of the new build and any subsequent owner.

A new build definition still remains broad. It also proposes prefabricated houses, relocated older properties, and converted existing dwellings into multiples dwellings to be considered "new builds".

Shared houses

Property owners will continue to be able to make interest deductions related to their main home. This exemption applies to landlords who rent rooms in their own houses to flatmates or Airbnb.

Other exemptions

  • The interest deductibility changes only apply to properties in New Zealand.
  • The new tax rules do not apply to student accommodation (e.g. University hostels)
  • Changes also don't apply to employee accommodation.
  • If your property is commercial or a farm, these are exempt from these changes, which only target property intended for residential use.

Build-to-rent developments

As the policy was introduced to help solve the rental housing crisis, purpose-built developments were seen as a new and separate asset class. The Government is currently seeking feedback on whether the 20-year "new build" exemption period (or even beyond 20 years) should be applied to build-to-rent properties.

The IRD has created a helpful summary document providing easy-to-understand information on these changes.

The information contained in this article is exclusively for promotional purposes. It does not in any way constitute legal advice and should not be relied upon as the basis for any legal action or contractual dealings. The information is not and does not attempt to be, a comprehensive account of the relevant law in New Zealand. If you require legal advice, you should seek independent legal counsel. myRent.co.nz does not accept any liability that may arise from the use of this information.

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