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Investment property: law changes and tips for maximising returns
Tuesday, 18 May 2021
Recent tax changes will impact residential property investors. We talk to some experts for tips on how to make the most of your investment properties.
What’s changing
For properties acquired on or after 27 March 2021:
- Legislation has passed that extends the bright-line test from five years to 10 years on residential property.
- The Government intends for the bright-line test to remain at five years for new builds and will be consulting on what a new build is soon.
- Legislation has passed that introduced a ‘change of use’ rule. If the sale of your property is subject to the bright-line test, and you don’t use a property as your main home for 12 months or more, you will be required to pay income tax on a proportion of the profit made through the property increasing in value.
- The Government has proposed that residential property investors will not be able to offset the costs of the interest they pay on loans to purchase residential property as an expense against their taxable income. A consultation will be held about this, with any law expected to come into effect from 1 October 2021.
For properties acquired before 27 March 2021:
- The previous bright-line test for five years will continue to apply for properties acquired before 27 March 2021.
- The government has proposed that interest on loans for investment properties acquired before 27 March 2021 can still be claimed as an expense, but the amount will reduce each year until it’s completely phased out by the 2025-2026 tax year. A consultation will be held about this.
Fact sheet: Proposed changes to bright-line test — Inland Revenue
Fact sheet: Proposed changes to interest deductions on residential property income — Inland Revenue
For properties acquired on or after 27 March 2021:
- Legislation has passed that extends the bright-line test from five years to 10 years on residential property.
- The Government intends for the bright-line test to remain at five years for new builds and will be consulting on what a new build is soon.
- Legislation has passed that introduced a ‘change of use’ rule. If the sale of your property is subject to the bright-line test, and you don’t use a property as your main home for 12 months or more, you will be required to pay income tax on a proportion of the profit made through the property increasing in value.
- The Government has proposed that residential property investors will not be able to offset the costs of the interest they pay on loans to purchase residential property as an expense against their taxable income. A consultation will be held about this, with any law expected to come into effect from 1 October 2021.
For properties acquired before 27 March 2021:
- The previous bright-line test for five years will continue to apply for properties acquired before 27 March 2021.
- The government has proposed that interest on loans for investment properties acquired before 27 March 2021 can still be claimed as an expense, but the amount will reduce each year until it’s completely phased out by the 2025-2026 tax year. A consultation will be held about this.
Fact sheet: Proposed changes to bright-line test — Inland Revenue
Fact sheet: Proposed changes to interest deductions on residential property income — Inland Revenue
Tips for landlords
Claim for everything you’re eligible for
Dan Hellyer, Partner, Deloitte Private, says if you look at an investment property as an income-generating asset not much has changed. “Although being able to claim the funding costs is being phased out, you can still claim ordinary operating expenses. These are the costs that are incurred in generating rental income.”
Sharon Cullwick, executive officer, New Zealand Property Investors' Federation, says sometimes people don’t bother claiming for small expenses, like vehicle costs when they travel to their rental property. “But it all adds up, so claim for everything you’re able to.”
Expenses you can claim for include:
- repairs and maintenance (but not renovations that substantially improve the value of the property)
- professional services fees, like accountants, lawyers or property managers
- rates and insurance
- mortgage repayment insurance
- vehicle and travel expenses when you travel to inspect your property or do repairs
- depreciation on capital expenses, like whiteware, appliances or heat pumps
- legal fees involved in buying a rental property, as long as the expense is $10,000 or less.
Rental property expenses — Inland Revenue
Dan Hellyer, Partner, Deloitte Private, says if you look at an investment property as an income-generating asset not much has changed. “Although being able to claim the funding costs is being phased out, you can still claim ordinary operating expenses. These are the costs that are incurred in generating rental income.”
Sharon Cullwick, executive officer, New Zealand Property Investors' Federation, says sometimes people don’t bother claiming for small expenses, like vehicle costs when they travel to their rental property. “But it all adds up, so claim for everything you’re able to.”
Expenses you can claim for include:
- repairs and maintenance (but not renovations that substantially improve the value of the property)
- professional services fees, like accountants, lawyers or property managers
- rates and insurance
- mortgage repayment insurance
- vehicle and travel expenses when you travel to inspect your property or do repairs
- depreciation on capital expenses, like whiteware, appliances or heat pumps
- legal fees involved in buying a rental property, as long as the expense is $10,000 or less.
Rental property expenses — Inland Revenue
