Key Tax Changes for Property Investors

Taxes are going up for most property investors in the market today. If you currently own residential investment property you are most likely going to be affected by Labour’s announcement for housing on the 23^rd March.

For those who are unaware, there are key changes occurring from the 27^th March (last Saturday) for existing, and would-be property investors in relation to property taxes, among other things.

The key changes are as follows:

Brightline Tax Doubled – Changing from 5 years to 10 years.

The bright-line test is effectively a capital gains tax on investment property, meaning that profits on the sale of property within 10 years could be hit with up to a 39% tax – depending on your tax bracket. As property prices have risen over the last few years, the profits on sale can be quite large and therefore end up in higher tax brackets quite easily.

First Home Loan & First Home Grant (via Kainga Ora) income caps and house price caps raised:

The income caps will move from $85,000 to $95,000 for a single applicant and $130,000 to $150,000 for two or more buyers. The property price caps would also raise for new-build properties to $700,000 in Auckland, $650,000 in Wellington and Queenstown, $600,000 in Nelson, Tauranga, Napier and Hamilton, $550,000 in Christchurch & Dunedin, and $500,000 in the rest of NZ.

While the above on the surface may be promising for first-home buyers and new-build purchasers/developers, another change coming in will definitely have an effect on the costs of holding existing property, which of course is likely to be passed on to tenants in the form of increased rents. If it is already difficult to save up a deposit for home-ownership, it’s about to get a whole lot harder with rising rents.

Removal of Interest Deductibility

Interest is a large proportion of the expense’s landlords carry when owning residential investment property. This will be something that moving forward landlords cannot write-off under the policy changes. This will apply to properties purchased after 27^th March, but will also apply to those properties purchased prior to this date as this rule is phased in between now and 2025.

Labour have called this a tax ‘loophole’ for property ‘speculators’. As a property investor, landlord and mortgage adviser I think the term ‘speculator’ being used to describe a long-term buy and hold investor and to call the write-off of interest costs a ‘loophole’ is extremely misleading and inaccurate.

Property is an asset class that often requires debt to be able to purchase it, simply because the price point is so high – relative to other asset classes. For landlords who own residential investment properties, interest is a genuine business expense incurred to own that property, and to provide housing accommodation for the tenant. Calling interest write-off’s a ‘loophole’ would be like calling “Cost of Goods Sold” a loophole for business that supply us with goods and services. As with any business, increasing production costs are always passed on to the tenant which would indicate the fact that rents are most certainly going to rise as a result of this change.

While the change is significant for everyone, it is towns/cities with higher priced properties which will feel it the most. An example of this is outlined below:

*Auckland house price estimated at $1m, Rotorua at $400k.

In the above example, the tax liability would be around $31.82 per week for the Auckland Investor, and $29.87 for the Rotorua Investor.

If however the Interest Costs were not deductible, it would look like this:

The tax liability would rise to $184.13 p/w for the Auckland Investor and $90.79 p/w for the Rotorua Investor. This is over a 470% increase and 200% increase respectively. Keep in mind the landlord still has to pay the interest costs. They are not removed from the cashflows of the property.

These changes are huge for property owners, both existing and would-be investors, and will certainly cause increases in rents for tenants in the years to come.

At KPM we believe investors should use this time to review their mortgage situation and their personal cashflow. If this change will cause pressure one option is looking to review the existing mortgages and see if increased cashflow can be created by extending loan terms, dropping interest rates or moving to interest only.

If we can assist at all please contact us on info@krispedersen.co.nz for a free no obligation chat.