In March 2021, the government announced significant (and unexpected) changes which impacted investors in residential rental properties.
This topic is so complex that we cannot offer a one-size-fits-all approach via a blog. Every single situation is different, and cannot be assessed before all facts are known.
Here’s a brief overview of the changes.
The Brightline part is already in force, and amended a couple of times already. It’s worth noting that these rules will all be back-dated to apply from 27 March 2021.
▶ Taxing gains on the sale of property (Brightline)
▶ Interest on rental property loans
▶ Recently confirmed (April 2022)
▶ Still under discussion
▶ References and reading
Taxing gains on the sale of property (Brightline)
New Zealand doesn’t have a capital gains tax, but profits from selling some assets can be taxable in some circumstances.
“Taxes and duties – an introduction to New Zealand’s tax system”
The basics
The first thing we consider is the acquisition date. Depending on when the property was purchased, and the length of time before you sell, you could be subject to tax on the ‘profit’*.
- Purchased on or after 27 March 2021 – 10 years
- Between 29 March 2018 and 26 March 2021 – five years
- Between 1 October 2015 and 28 March 2018 – two years
- Prior to 1 October 2015 – no restrictions
- ‘New-builds’ – five years
The technicalities
- A ‘sale’ could include a transfer to a related party and/or a trust, which could restart the Brightline clock
- Implications of converting your family home into a rental property
- Different rules apply if the property is a ‘new-build’
- What is considered to be a ‘new-build’?
- Previous property transactions involving yourself, partner, related parties, and trusts need to be considered
- A transaction within a trust could put the settlor’s tax position at risk on their own property
- Depending on the circumstances, ‘acquisition date’ could be:
- Deposit paid
- Conditional sale and purchase agreement
- Unconditional sale and purchase agreement
- Date financing is confirmed
- The date the family home was converted into a rental property
* If the property has been your main home, inherited, or being sold as part of a deceased estate, the Brightline rules may not apply.
Interest on residential rental property loans
The basics
- Interest deductibility on residential rental property loans is being phased out
The technicalities
The amount to be deducted depends on:
- The structure of the loan – variable or fixed, revolving credit
- Whether the loan is used solely for the purchase of residential property
- Whether or not the property is being refinanced
- The date the property was acquired
- Whether or not the property is a ‘new-build’
- Whether or not the property was a ‘new-build’ for the person selling the property to you
Recently confirmed
- Interest that has not previously been claimed can be deducted when selling the property. The profit would be – sale price less purchase price less (unclaimed) interest expense while holding the property.
- Inland Revenue has confirmed that for residential rental properties which are new-builds (Code of Compliance issued after 27 March 2020), interest is fully deductible for a period of 20 years. The 20 years is ‘attached’ to the property – you could be the third owner of the property and still claim interest if its Code of Compliance was issued after 27 March 2020.
- The 5-year Brightline period for new-builds generally starts from the date title is issued. If the new-build is purchased off plan, the clock starts ticking from the date you sign the contract.
Still under discussion
- Inland Revenue intends to advise a change to the law because Brightline could impact parents helping children into home ownership. Parents co-owning or gifting properties could themselves be subject to Brightline tax.
- Whether a change in government could reverse (part of) these pieces of legislation.
References and reading
Here are just some of the literature on Brightline and interest deductibility.
Design of the interest limitation rule and additional bright-line rules – a Government discussion document – June 2021 (143 pages)
Design of the interest limitation rule and additional bright-line rules – questions and answers – July 2021 (77 questions and answers)
Interest deductibility proposals at a glance – September 2021 (12 pages)
Bright-line property tax (Inland Revenue)
Taxation (Bright-line Test for Residential Land) Act 2015
Summary
There are so many things to consider whether the purchase or sale of a property will impact you from a tax perspective. Now, even more than ever, we strongly recommend you discuss your specific situation and the consequences with your legal advisor and/or accountant.
The difference between paying and not paying tax could be just a few days, depending on the ‘acquisition date’ and ‘selling date’.
Beany is always happy to help and can set an up-front fee, depending on the work to be performed – you won’t encounter any surprises.
