Report follows new housing package’s tax changes impacting property investors
The Ministry of Business, Innovation, and Employment (MBIE) has interviewed some experts for tips on making the most of investment properties following the new housing package’s tax changes impacting property investors.
In March, the government released a new housing package to address the housing crisis and support first-home buyers (FHBs) into homeownership. As part of the new housing package, the government extended the bright-line test from five years to 10 years and introduced a “change of use” rule.
The “change of use” rule requires property owners to pay income tax on a proportion of the profit made through the property increasing in value if their property’s sale is subject to the bright-line test and they do not use the property as their main home for 12 months or more.
The government also proposed that residential property investors cannot offset the costs of interest they pay on loans to purchase residential property as an expense against their taxable income.
However, the government clarified that the previous five-year bright-line test will continue to apply for properties acquired before March 27, 2021. It also outlined that interest on loans for investment properties acquired before March 27 can still be claimed as an expense, but the amount will reduce annually until it is completely phased out by the 2025-2026 tax year.
Experts interviewed by MBIE advised property investors to claim everything they are eligible for, including:
- Repairs and maintenance (but not renovations that substantially improve the value of the property);
- Professional services fees, like accountants, lawyers, or property managers;
- Rates and insurance;
- Mortgage repayment insurance;
- Vehicle and travel expenses when you travel to inspect your property or do repairs;
- Depreciation on capital expenses, like whiteware, appliances, or heat pumps; and
- Legal fees involved in buying a rental property, as long as the expense is $10,000 or less.
Deloitte Private partner Dan Hellyer pointed out that not much had changed if you treat an investment property as an income-generating asset.
“Although being able to claim the funding costs is being phased out, you can still claim ordinary operating expenses. These are the costs that are incurred in generating rental income,” Hellyer said.
Sharon Cullwick, an executive officer at the New Zealand Property Investors’ Federation (NZPIIF), said people sometimes do not bother claiming for small expenses, like vehicle costs when they travel to their rental property. However, “it all adds up, so claim for everything you’re able to.”
“New Zealand needs rental housing stock as much as ever. From a diversified portfolio point of view, it’s still a great step for people to consider and will remain a feature of investment portfolios for middle New Zealand,” Cullwick added.
Hellyer claimed that now is a good time for investors to take a good look at their portfolio. However, Cullwick said it is crucial to consider what costs could be in the next few years rather than concentrate only on what they are now.
“If you bought your property before March 27 this year, the ability to claim your interest as an expense may be phased out over the next few years. So your costs may rise over that time. Interest rates are also at historic lows and could rise in the next few years,” Cullwick added.
Cullwick advised investors to consider a property’s ability to generate income, how much their costs will rise as interest deductibility is phased out, what their current interest rates are and how long they have fixed them for, if maintenance and repairs are up to date, and if the properties meet healthy homes requirements.
“Make sure your property can pay for itself,” she said. “Don’t have a property that you need to dip into your own pocket for and pay $50 or $100 a week for the next 25 years.”
Hellyer reminded investors that consultations are ongoing about the exact definition of a new build, adding: “You might buy an old house, demolish it, and build a new one in its place. While you and your bank would probably consider that a new build, Inland Revenue is still consulting to determine how the new legislation will deal with such a situation.”