Property investor reaction 'very positive'
The return of interest deductibility on rental properties is a “huge win” for property investors, and may also support improved conditions for tenants, an Auckland mortgage adviser says.
In March 2022, the Labour government announced that the ability for landlords to offset interest expenses against their income for tax purposes would be axed. For properties purchased before March 27, 2021, ahead of the 2023 NZ general election, interest deductibility was in the process of being phased out.
The National Party has made good on its pre-election promise to restore interest deductibility on rental properties, a Coalition Agreement between National and ACT released in November stating that 60% deductibility would be restored in 2023/24, 80% in 2024/25 and full deductibility from April 1, 2026.
Eugene Bartsaikin (pictured above) director and mortgage adviser at Twine Financial Advisers described property investors’ reaction to restoration of interest deductibility rules as “very positive”.
“The return of interest deductibility is a restoration to normal and has provided a pathway forward,” he said.
Bartsaikin said that the policy change would provide opportunities for property investors to reconsider their financial situation and future plans.
He gave an example of a professional couple who own a small home and a rental property, who had intended to sell their rental to enable them to upgrade. Restoration of interest deductibility means they are likely to have the option to retain their rental property and renovate their existing home in the coming year, meaning that the tenant retains their accommodation.
“This is a very typical landlord who is now trying to work with their tenant to make a win-win for everybody,” Bartsaikin said.
“It buys them time to do so, so overall it’s a huge win.”
Property investors stuck subsidising properties
Bartsaikin noted that when the tax deductibility rules were changed in March 2021, interest rates were in the 2% range. They are now upwards of 6% and 7%, a position that the current legislation did not appear to consider.
“It’s a vastly different equation when you can’t claim that interest expense now compared to where it was before,” Bartsaikin said.
“If interest rates were 2%, I think most people would be able to live with that, but because they are where they are, it just doesn’t work.”
Despite strategies used to stagger their exposure, Bartsaikin said that many of his property investor clients had already been hit by higher interest rates, or were aware that higher rates were imminent.
Before the National-led government confirmed that interest deductibility on rental properties would be restored, quite a few investor clients were prepared to sell, he said.
“Many [investors] were stuck supplementing the property from their own cash and they were already stung by the cost of living crisis, they can’t increase the rents high enough because incomes haven’t kept up,” Bartsaikin said.
“Almost every investor is subsidising the property in one way or another.”
Interest deductibility rules return to ‘global status quo’
Bartsaikin said that the planned phased return of interest deductibility restores property tax rules to a “global status quo”.
“Previously, a property could be neutral (rent sufficient to cover debt), but with interest deductibility, there’s an additional payment to make to taxes that’s on income that was not actually made,” Bartsaikin said.
Investors have had to come up with the additional cashflow from their own private sources. As many are employees, Bartsaikin noted that the solution was not as simple as asking for a 20% pay rise.
Ahead of the tax deductibility legislation being passed and with full deductibility to return from April 1, 2026, Bartsaikin said that he did not expect an influx of property investors to the property market.
“What it has done is give confidence to existing investors or those who are planning their portfolios, to think about what needs to be sold or changed,” Bartsaikin said.
Noting that the property market is “transacting” but not red hot and demand for rental properties had increased, Bartsaikin said that the change in rules open the door for people to buy older properties in need of rejuvenation and rent them out.
He also expects that increased flexibility as a result of a change in interest deductibility rules will support positive interactions between landlords and their tenants.
Are property investors feeling encouraged by the change in interest deductibility rules? Share your thoughts in the comments section below.