Rental Properties – Bright Line And Interest Deductiblity

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Bright Line Tax Rules

The Bright Line Tax rules in New Zealand are set for significant changes starting from 1 July 2024. The core amendment is the reduction of the bright-line property rule’s application period. After this date, the rule will apply only if a property is sold within 2 years of purchasing it, a notable shift from the current periods of 5 years for properties bought between 29 March 2018 and 26 March 2021, and 10 years for those acquired on or after 27 March 2021. This change simplifies the tax landscape significantly, making it easier for many property owners to navigate their tax obligations​.

Furthermore, these modifications are part of a broader suite of potential tax changes following the election. The initial introduction of the bright-line tax aimed to target property speculators, starting with a 2-year period under the National government in 2015, which was later extended by the Labour government to 5 and then 10 years. The proposed rollback to a 2-year period is seen as a move to alleviate some of the unintended consequences and complexities introduced by the longer bright-line periods, including the need for numerous exemptions and roll-over relief measures.

However, details on the implementation and the status of specific provisions, such as roll-over relief rules and new build rules, remain to be clarified as part of the legislative process​​.

This rollback to a 2-year period represents a significant shift in the property tax landscape, potentially impacting a wide range of property transactions and ownership strategies in New Zealand. It may be prudent for property owners and potential buyers to stay informed on these developments and consider how they might affect their property decisions moving forward.

Interest Deductibility

The rules surrounding interest deductibility on rental properties in New Zealand have undergone significant changes in recent years, impacting landlords and property investors.

Initially, the Labour government introduced limitations to the deductibility of interest expenses for residential rental properties starting from October 2021. The aim was to cool down the housing market by phasing out the ability for landlords to deduct mortgage interest from their taxable income. For properties acquired before 27 March 2021, this phase-out was set to occur gradually until 31 March 2025, starting with a 25% reduction in the amount of interest that could be deducted, increasing annually until complete non-deductibility by 2025. Properties purchased on or after 27 March 2021 were immediately subject to these limitations, with no interest deduction allowed​​.

However, the incoming National-led government proposed amendments to these rules to restore some balance. Their plan includes a phased reintroduction of mortgage interest deductibility for rental properties. This phased approach starts with a 60% deduction allowed for the 2023/24 tax year, increasing to 80% in the 2024/25 tax year, and reaching full 100% deductibility by the 2025/26 tax year​​.

Specific exclusions and exemptions were also part of the original policy, catering to new builds, land development for residential purposes, and boarding establishments with certain criteria, ensuring interest deductibility under particular conditions​ .

Landlords and property investors should note these changes and plan accordingly. It’s advisable to consult with a tax advisor or property management expert to understand how these rules apply to individual situations and to stay updated on any further legislative changes. Maintaining accurate records and staying informed will be key in navigating these tax obligations effectively.

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