The amendments will provide dwellings which meet the build to rent requirements with an exemption from the interest limitation.
What is the interest Limitation?
This limitation has been in place since October 2021 and aims to assist first home buyers and owner occupiers. It means that interest cannot be claimed as an expense against rental income. However, it has been considered necessary to exempt new builds to ensure that these new rules do not negatively impact the supply of rental property.
Proposed Amendments
The bill proposes a new definition of “build to rent” in S YA 1 of the ITA. The interest limitation rules would not apply to interest incurred concerning build to rent property. Therefore, interested can be claimed against these properties.
What is a “Build to Rent Land?
Build to rent land is land to the extent which:
- It has 20 or more dwellings
- Each dwelling is for use or being prepared/restored for use under a tenancy where the Residential Tenancies Act 1986 applies
- Every tenancy has the option of a 10 year term with the ability to give 56 days’ notice of termination.
- Every tenancy agreement includes a personalisation policy beyond what is already allowed under the RTA
The land cannot fail to meet the above requirements at any time. The dwelling will need to qualify for the “to the extent test”. This means that each individual dwelling as well as the overall development must meet the definition for interest to be deductible.
The development must be owned by the same person (natural person/legal entity) o qualify for the exemption
Existing Dwellings
This policy will apply to new as well as existing build to rent developments. It is unlikely any existing developments would have offered a 10-year tenancy and so they will have until 1 July 2023 to comply with the above requirements in order to qualify.
Cease of Exemption
One the development fails to meet one of the requirements, interest will no longer be deductible not jut for the individual property, but for the whole development.
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