Landlords 'let down' by existing laws, says property accountant
As voters head to the polls for the 2023 General Election, the prospect of having interest deductibility on rentals fully restored is top of mind for many landlords, a property accountant says.
Earlier this year, the National Party promised to reinstate tax deductibility on rental properties if it gained sufficient support to form the next government.
National Party finance spokesperson Nicola Willis (pictured above left) confirmed in a statement provided to NZ Adviser on Wednesday that under a National-led government, tax deductibility would be phased back in.
“Interested deductibility will be fully restored from April 2026,” she said.
Property interest limitation rules, announced by the Labour government in March 2021, effective from October that year, removed investors’ ability to offset interest paid on their mortgage against rental income for tax purposes. New build properties (code of compliance issued on or after March 27, 2020) are exempt from the above rules, as is emergency, social and transitional housing.
For properties purchased before March 27, 2021, landlords can claim 50% of the interest cost in the current tax year, reducing to 25% in April 2024 and zero deductibility available from April 1, 2025.
Anthony Appleton-Tattersall (pictured above right), specialist property accountant at AAT Accounting Services told NZ Adviser that the new tax rules were poorly considered and punished younger, early-stage investors who had higher debt loads.
Overall, he said that his property investor clients felt “extremely let down” by the existing laws.
Noting that most of his clients owned one or two rental properties and were working to save for their future, Appleton-Tattersall said that while no one loved paying tax, they accepted that tax should be paid on profit.
“But with interest rates rising, many of my clients are losing thousands a year, and yet still paying thousands in tax,” he said.
Appleton-Tattersall said that over the last couple of years, property capital values had substantially declined, meaning that landlords were being taxed on “genuine economic losses”.
Noting that the rules were introduced shortly after the bright-line test extension, Appleton-Tattersall said that the prospect of a large tax bill had deterred many investors from selling, keeping them “locked in”.
Since early 2022, he had taken on a number of clients moving overseas who had decided to rent out their private home (purchased after March 2021) rather than risk financial loss if they sold. The clients were not investors at the time they purchased their home, therefore paid no attention to tax law, he said.
“They are shocked to hear they can't claim any of their interest costs and will have substantial tax bills (usually around $4,000 to $10,000 annually) despite making substantial cashflow and capital losses,” Appleton-Tattersall said.
In its ‘Back Pocket Boost’ policy document, the National Party outlines that the current level of 50% deductibility would be maintained in April 2024 (instead of reducing to 25% as proposed currently). Interest deductibility would increase to 75% in April 2025 – the date on which under rules, tax deductibility would be fully phased out – with full deductibility restored from April 2026.
Considerations for proposed reinstatement of tax deducibility
If National is elected, Appleton-Tattersall said it would be important to receive clarification on how debt raised since March 2021 would be treated as part of the planned reversal.
For example, a property purchased in July 2021 that does not meet any of the exemptions (such as ‘new build’ status) currently has a 0% interest claim and it is unclear in this situation whether interest deductibility would rise to 50% in April 2024.
Along with reinstatement of tax deductibility on rental properties, the mortgage and finance industry is supportive of a windback of the CCCFA and improving financial literacy, discussion and legislation around fraud and scams, a review of KiwiSaver, collaboration and coordination among regulators and achievement of climate change goals.
Do you support the reinstatement of interest deductibility on rental properties? Share your thoughts in the comments section below.