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April 20, 2021

The new Tax Rules for Rental Property in New Zealand

Written by: superadmin

Many New Zealand landlords got a bit of a fright on 24 March 2021 when the Government announced the new housing policy for property investors.

Whilst there are quite a few different factors to consider in the new policy, in this article, we have decided to concentrate on the tax component as we are well aware that anything tax-related is never as straightforward as it sounds.

 

Prior to the Rental Property Tax Changes
Those who already own rental property have for years been able to enjoy lower tax bills. This is because mortgage interest costs have always been deductible from the rent received, along with operating expenses and chattel depreciation.

Annual Rent

Operating Expenses

Interest Expenses

Chattel Depreciation
————————
= Taxable Income

That ‘Taxable Income’ is then multiplied by your tax rate to determine how much tax you need to pay on your property’s income.

 

Following the Rental Property Tax Changes
Under the new rental property tax rules, you will no longer be able to deduct your mortgage interest payments, meaning that, as far as the IRD is concerned, you are receiving more income, and therefore your tax bill is higher:

Annual Rent

Operating Expenses

Chattel Depreciation
———————-
= Taxable Income

 

When do the New Tax Rules for Investment Property Take Effect
If you already owned investment property before 27 March, these rules will be phased in over the next four years as follows:

Period

 

Percent of interest you can offset

 

1 April 2020 to 31 March 2021 100%
1 April 2021 to 30 September 2021           100%
1 October 2021 to 31 March 2022 75%
1 April 2022 to 31 March 2023 75%
1 April 2023 to 31 March 2024 50%
1 April 2024 to 31 March 2025 25%
From 1 April 2024 onwards 0%

 

As of 1 April 2025, no existing properties will be able to deduct any mortgage interest from their rental income.

If your investment property is purchased after 27 March, then you won’t have the ability to deduct your interest costs after 1 October 2021.

 

Now for some Good News!
Any owners of ‘new build’ properties will be exempt from the above rule and be able to continue to deduct their interest costs from the annual rent.

For a property to be considered a new build, it needs to have been bought directly from the developer and have received its code compliance certificate within the previous 12 months.

These new tax-deductibility rules now add to the list of financial benefits of buying a new build as an investment property.

 

Other Factors that Can Affect your Rental Property Income
There are so many factors that could affect your property’s tax outcome – the level of your mortgage, tax rate, interest rate, rent yields, just to name a few – so this new housing policy will affect everyone differently.

The most significant outcome is that those who choose to invest in a new build property will be less impacted as they will be exempt from the tax-deductibility rules and some of the other rules set out in the new policy.

Now is always the best time to start your journey to financial freedom by investing in a new build property. At Wolfbrook, we have a team of knowledgeable property experts on hand to answer any questions you may have about buying property and why investing in a new build property is the best option for you.


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