Are you thinking of buying a rental property or holiday house? It might be time to think about a new build.
The Government recently announced that any new build which received its code compliance certificate after March 27, 2020 will be exempt from its new tax rules which limit deductibility on interest payments against rental income.
That means you can own a new house and continue to get a tax advantage for 20 years by being able to claim tax deductions on mortgage interest payments against your rental income. This will also apply to purpose-built rentals.
Growing New Zealand’s housing supply
Why are these new rules being put in place? The aim is to support more homes being built and help first-time buyers get a foot on the housing ladder.
By making new builds more attractive to investors, the Government hopes their money will be helping to drive higher levels of house construction. This should help developers to sell off-the-plan properties, supporting a boost to our housing supply.
By limiting interest deductibility on existing homes, investors will hopefully buy less existing stock, leaving more available for first-home buyers. Overall, the Government does not want to see the runaway growth in house prices we experienced at the start of 2021.
You can read more about the new build policy here.
Interested in new builds? We can help
If you are interested in investing in rental property or about to buy a house or holiday home, this is a great time to run the numbers on a new build.
There are now many advantages to buying a new build, including lower initial deposit requirements and more financial support for first-home buyers. In addition, new builds are constructed to a high standard and have far lower maintenance costs than most existing homes. They easily attract tenants and in a rising market they may have built-in equity by the time you take possession.
Interest limitation on existing residential investment property
If you already have an existing rental the new rules on interest deductions you may want to review your existing portfolio in light of these new rules.
The Government has released draft legislative proposals to limit interest deductibility for residential property investments. From 1 October 2021:
- for properties acquired before 27 March 2021, interest deductions on loans will be phased out at 25% per year over 4 years, until 31 March 2025
- for properties acquired after 27 March 2021, interest deductions will not be deductible (unless the property was acquired by an offer made on or before 23 March 2021 that could not be withdrawn before 27 March 2021)
The focus is on residential investment properties which can be used for long term accommodation. Typically, this would mean a house or an apartment, whether it is used for providing short-term or long-term accommodation, or even left vacant. It leaves out:
- the main family home
- several types of residential property, including farmland, certain Māori land, student, employee, and rest home accommodation
- property developers, who can continue to deduct interest expenses
- new build properties, which are exempt from the interest limitation rules
- hotels, and other businesses set up to provide short-term rather than long-term accommodation
- owner-occupiers who rent to flatmates
The proposed rules also contain allowance for interest deductions on a taxable sale of residential property, although deductions may be limited to the gain on sale.
Keep in mind that the proposals will be considered by Parliament and may change before being introduced.
We can work with you to do the sums on the impact on the new interest deductibility rules and whether a new build could be a smart choice for a home, holiday house or rental property investment.