Changes to tax deductibility on interest expenses
In late March earlier this year, the Labour Government announced a number of changes regarding the New Zealand housing policy in an attempt to make the housing market more affordable, particularly for first home buyers. This article specifically discusses interest expense deductions on residential properties and how these will change.
Currently, when owners of residential investment properties (not their main homes) complete their annual tax returns, they can deduct any interest paid on loans from their taxable income as an expense. This reduces the income they earn, thus reducing the amount of income tax to pay.
The Government has proposed to change the rules that enable investors to claim interest on loans as an expense against income for their residential properties. The Government is yet to confirm the details of this proposed change, however, legislation effecting these changes is expected to come into force from 1 October 2021, i.e. owners of residential investment properties purchased after 27 March 2021 cannot deduct interest from their income from 1 October 2021. However, it is expected that there may be an exemption for new builds used as residential investment properties to encourage investors to provide healthy homes for renters. There is also a hopeful expectation that these investors may be permitted to deduct their interest expenses at the time of sale where they are caught by the bright line test and liable to pay income tax on the gain of sale.
Residential investment property owners who acquired properties before 27 March 2021 can still claim interest as an expense, however, the amount that can be claimed will be reduced by 25% over the next four years and will eventually be phased out. The 2025-26 income year will be the first year that interest expenses cannot be deducted from taxable income (with exceptions yet to be confirmed and as canvassed above).
Some common scenarios to be aware of as advised by the IRD are as follows:
Keep an eye out for any IRD updates on this matter and ensure you consider your position carefully when looking into investing in residential properties. It is prudent to speak with your accountant and lawyer before investing in the housing market whether it be a new build, existing property or even your main home.