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Change of interest deduction on residential property income.

 

The Government announced today that it has agreed to change the interest deductibility on residential property income. The detail of these proposals acquired by the IRD will be consulted, and legislation will be introduced shortly. This is unprecedented move to cool the heated property market. It is pretty much viewed as biased approach from the NZ property investors as interest deductibility is disallowed only for residential property investment sector. The deductions for interest are available for all other kind of businesses and investment.

Current law: 

Currently the residential investment property owners can deduct the interest on loans from their taxable income to reduce the residual tax payment.

For all investor interest cost is the largest single expense, in the absence of interest deductibility, the taxable income portion would be very high.

Future changes:

Interest on loans in relation to the residential property acquired before 27 March 2021 can still be claimed as an expense against the property income. However, this will be phased out in 4 years.

Interest paid for ones acquired on or after 27 March 2021 will not be allowed to claim as an expense.

The amount of interest to be deducted will be reduced 25% each income year until the interest deductibility completely phased-out.

Effective date: 1 October 2021

Property acquired before 27 March 2021:

 

Income Year

Percent of interest you can claim

1 April 2020–31 March 2021

100%

1 April 2021–31 March 2022

(transitional year)

1 April 2021 to 30 September 2021 - 100%

1 October 2021 to 31 March 2022 - 75%

1 April 2022–31 March 2023

75%

1 April 2023–31 March 2024

50%

1 April 2024–31 March 2025

25%

From 1 April 2025 onwards

0%

 

*Additional debt occurred on or after 27 March 2021 in relates to the investment property will be captured by the new law, which means interest on the additional debt cannot be claimed as an expense from 1 October 2021.

Property acquired on or after 27 March 2021:

Any interest on loan in relates to the residential property acquired on or after 27 March 2021 will not be able to claim as an expense against the property income.

*Non-housing business used residential property, property developers and builders, are exempt from this change.

Impact on residential property market.

The Govt. has sent very strong signals that if you are willing to invest into NZ property market.  You will have to pay tax on rental income and pay tax on any gains made upon sale. The policy is going to affect all investor who invest with a strategy of Buy and Hold. This will put off lot of buyers who buy a residential house and let the rent pay off the mortgage. Now, they will have to pay tax each year as the net rental income is likely to supersede the expense. 

 

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