Residential Rule Changes March 2021
Proposed changes to the Bright-line Test and Interest Deductions on Investment Property
The Government has announced changes to tax rules which are part of a wider package intended to help address housing affordability.
The changes which will impact residential property investors can be summarised as follows:
• The bright line test is to be extended from its current 5 year period to 10 years. The 10 year period will apply to a residential property acquired on or after 27 March 2021;
• Newly built houses (new builds) acquired on or after 27 March 2021 will continue to fall under a 5 year bright line period;
• Interest deductions on residential investment property acquired on or after 27 March 2021 will not be allowed from 1 October 2021;
• If money is borrowed on or after 27 March 2021 to maintain or improve a property that was acquired before 27 March 2021, it will be treated in the same way as a loan drawn down to acquire a property on or after 27 March 2021. As such, interest will not be able to be claimed on loans of this nature from 1 October 2021;
• The ability to deduct interest on an existing loan that was drawn down to acquire a property before 27 March 2021 will be phased out. 100% can be claimed in the 2021 year and until 1 October 2021 at which point the percentage will reduce by 25% each income year until the 2025-26 year when no interest will be able to be claimed as an expense.
• For residential properties acquired on or after 27 March 2021, including new builds, a change of use rule will apply if the property was not used as the owner’s main home for more than 12 months at a time within the bright line period. The impact of this rule will be that the part of a gain referable to the period when the property was not the owner’s main home will be taxable.
As a recap, the bright line rules seek to tax any gain derived following the sale of a residential property if it is sold within the bright line period (5 years for properties acquired between 29 March 2018 and 27 March 2021 and thereafter 10 years).
Inherited properties and those which have been the owner’s main home for the entire time they owned it will continue to be exempt from all bright line tests.
The Government intends to consult on exactly how the announced changes will be legislated and it is clear from the above that the rules add further complexity to New Zealand’s tax system.
Please do contact your Campbell Tyson advisor to discuss how these changes will impact you.
More detail in respect of the proposed changes can be found at the following links.