Some investors will still be able to deduct interest payments from taxable income
In a bid to encourage more building activity, the government has announced that newly built investment properties will still be able to deduct their mortgage interest payments for tax purposes. The ability for other investors to deduct their interest payments from taxable income will be phased out from Friday, and the process will continue until March 31, 2025.
New build homes and purpose-built rentals will be exempt from the investor tax changes for a period of 20 years, provided that a property received its code compliance certificate after March 27 of last year. The exemption will apply both to the initial buyer of the new build, and also to any owners who purchase the property within the 20-year period.
This follows the government’s March announcement that tax deductions on interest rate costs would be removed for investment properties. In a bid to cool the housing market and bring price growth under control, the government also extended the bright line test from five to 10 years.
Housing Minister Megan Woods said that ‘build to rent’ developments would be particularly encouraged, and said that there was a potential for some further concessions to be applied to these types of builds.
Read more: Experts reveal impact of new tax rules on property investors
“Purpose-built rentals are large residential developments designed for ongoing rental, rather than sale,” Woods said. “This is an emerging area, and one where we see real potential to meet gaps in our rental market.
“I am expecting further advice on purpose-built rentals in the coming weeks, and will report back to Cabinet on whether there should be an extension beyond the 20-year period for some or all of this sector.”
Commenting on the changes, Deloitte partner Robyn Walker said the new rules were “more generous” than she expected, but could still cause some confusion among investors on who is eligible for concessions.
“They have been relatively concessionary,” Walker said. “But the rules are complex. I think that will be a real challenge to a lot of people, and they will need to get advisers to be able to understand them.”
Kiwibank senior economist Jeremy Couchman said that he still anticipated price growth to slow down over the coming year, given the anticipated rise in mortgage rates, tighter lending restrictions and a stronger focus on increasing housing supply.
“Today, the government tied up some loose ends from its March announcement that mortgage interest will no longer be a tax deductible expense for property investors,” Couchman said.
Read more: The “urban myth” surrounding New Zealand’s property investors
“Importantly, the government has recognised the adverse supply impact of the tax changes on new and desperately needed rental properties. Mortgage interest expense will remain deductible for up to 20 years on newly built investment properties, with ‘new builds’ defined as having a code of compliance granted on or after March 27 last year.”
“Today’s announcement will unlikely impact construction activity in the near-term,” Couchman said.
“The pipeline of home building is long, and capacity constraints in the building industry are a more pressing issue. However, over the medium term, interest deductibility on new builds should help increase new home construction.
“Investors that may have previously focused on exiting property may be nudged towards new builds instead.”
Couchman said that when it comes to supply, a focus on infrastructure and removing “overly restrictive zoning rules” will be most important. He said that reworking the Resource Management Act would be a ‘crucial’ part of this process.
However, he said that Kiwibank’s overall view of the trajectory of the property market has not changed, and he expects that all of the tools put in place to try and cool house price growth will achieve their aims over time.
“Today’s announcement does not alter our housing market outlook,” Couchman said.
“We expect house price growth to cool from current record levels across Aotearoa over the year ahead. Rising mortgage rates, further lending restrictions such as tighter LVRs from November 01, affordability constraints, and a boom in new housing supply should all work to cool the market over the year ahead.
“We still expect national house price growth to cool to around 1% year on year this time next year, with house price falls a distinct possibility.”
