Property Investors back in business, the bill heralding property tax change is released.

At long last, and after various “amendments” to the pre-election promise to restore interest deductibility for residential lending, the bill that will change the law to deliver on the promises has been released.

This contains mostly good news for property investors.

Sense and fairness are being restored in some measure. Perhaps now we will hear less from uninformed journalists reporting that “tax breaks” for landlords are to be reinstated.

The ability to take a tax deduction for interest on money borrowed to buy an income earning asset, that every other industry enjoys, could hardly be described as a tax break.

So what are the key changes?

1. Interest deductibility the be phased back in for residential lending. 
2. Brightline to be returned to two years from 1 July 2024
3. Depreciation on commercial buildings to be removed from 1 April 2024.

What’s not being done?

The much-hated loss ring fencing rules that are a targeted measure at residential landlords remains, meaning that if your restored interest deductions tip you from profit to loss, these losses can only be offset against residential rental income, not your other personal income.

The detail in the bill has provided answers to some of the nagging questions that remained when we were reliant solely on political promises to map our property strategies.

Here are the key take aways.

Interest deductibility.

Residential interest deductibility will be as follows.

2024 year 50% (not the 60% promised in the coalition agreement).

2025 year 80%

2026 year 100%

Importantly, the deductions will be available for all residential property, regardless of whether it was acquired before or after 27 March 2021. So, if you purchased a non-new build property after this date, you will gain 80% deductibility for the 2025 year. Accountants have been waiting for clarity on that point and thankfully, it is there.

If you find yourself with a tax liability for a sale within a brightline period, you will also be allowed to claim the interest you have thus far been denied a deduction for against the brightline gain.

Brightline

The changes restore brightline to 2 years for brightline end date sales that occur after 1 July 2024 ie, for agreements entered into post 1 July 2024.

The complex time and land area apportionment rules associated with the main home exemption will be simplified. The main home exemption will again apply as it did originally when the land has been used predominantly (more than 50%) for most of the time the person has owned the land.

In a surprise and welcomed move, the current rollover relief provisions will be extended to include all transfers of land between associated persons provided the transferee was associated to the transferor for at least two years prior to the transfer.

This change recognizes that transfers between associates, that include things like normal estate planning measures, are not the speculative land transactions the brightline rules were originally designed to capture. Hallelujah, some sensible flexibility that will reduce the incidence of unintended consequences from the brightline rules is to be introduced.

Removal of depreciation on Commercial Buildings.

One of the measures designed to fund tax cuts to middle income earners was the removal of the 2% depreciation deduction on commercial buildings. This is included in the bill and will apply to the 2025 income year.

The ability to depreciate separately identified fit out and chattel item’s remains as these items are not buildings.

On that point, remember the purchase price apportionment rules apply to commercial acquisitions, these rules bind both vendor and purchaser to the same split between land, buildings and fit out, so the fit-out value of an acquisition needs to be determined and negotiated with the vendor. You can no longer simply commission a fit-out valuation after settlement. 

So, there you have it, these are the tax measures designed to restore a functioning private landlord sector in New Zealand.

Back in business.

Written by Mark Withers - PKF Withers Tsang https://pkfwt.co.nz/meet-us/mark-withers/