Changes to residential property tax rules, by Dale Adamson
Another change is more detailed reporting requirements for Trusts, which we will cover in a separate article.
Bright Line Test (effective date 27 March 2021).
The aim of the bright line test is to bring gains on sale of residential property into the tax net. There are some exemptions e.g., if it’s your main home, inherited property or transfer to estate administrator on death.
The ownership period has now been extended from 5 to 10 years to escape the tax. New builds remain at 5 years. Though there are specific guidelines to meet.
Properties acquired between 29/3/18 and 26/03/21 are subject to a 5-year period. Between 1/10/15 and 28/3/18 was 2 years.
Originally the main home exemption meant that, if a property was used principally as a main home for over 50% of the period, it was exempt from the bright line test. This rule continues for pre-27 March 21 acquired properties.
A new change-of-use test applies to properties acquired after that date where there is a period of more than 12 months when the property was not used as a main home.
The all or nothing approach to the main home exemption has disappeared and been replaced with a tax on the prorated portion of the capital gain.
Residential properties that provide short-stay accommodation, where the owner does not live in the property, are subject to the bright-line test, and cannot be excluded as business premises.
The profit is taxed at part of the taxpayer’s assessable income for the year of sale. Remember that any taxable income from the bright line test will affect any obligations such as student loan repayments, child support payments and eligibility for Working for Families.
Residential Rental Interest limitation rules (effective 1 October 2021)
The 2022 tax year sees the introduction of the limitation of interest deductibility on funds borrowed to acquire residential rental properties. Eventually there will be no interest claim available.
If the property was acquired on or after 27 March 2021, 100% interest claimable till 30 September 2021 when it goes down to 0% thereafter.
For properties acquired pre-27 March 2021 interest can still be claimed on existing loans, phasing out completely by 1 April 2025. The claims are:
1/04/20 - 30/09/21 100% (6 months)
1/10/21 - 31/03/23 75% (18 months)
1/04/23 – 31/03/24 50% (12 months)
1/04/24 – 31/03/25 25% (12 months)
1/04/25 - onward 0%
If additional debt (drawing on same loan or taking a new loan) is incurred after 27 March 2021, even if it relates to a property acquired before that date, interest deductibility will cease on that portion of the loan from 1/10/21. E.g., borrowing funds for maintenance or upgrades of the property. The treatment of refinancing existing loans on pre-27 March 2021 property will come within the four-year phase out rules, if the debt isn’t increased.
New builds, as defined by the IRD, may have an exemption from the interest limitation rules for up to 20 years.
As this is a complicated area, we recommend that you contact your tax advisor to determine how these changes affect your circumstances, before entering into agreements.