Last week, the Minister of Finance Grant Robertson, announced proposed changes for residential property acquired by investors. While it was no surprise around the announcement of the changes, no one really expected how quick the new changes would come into play. 

While the announcements were mostly positive from a first home buyers perspective, there were two changes made that affect investors quite dramatically going forward.

The first change was, as expected, an extension of the Bright-Line test from 5 years to 10 years for existing properties. This means any property bought from March 27th, 2021 (with the exception of the family home) will be taxed on the gain made on the property, between the purchase price and the sale price if it is sold before 10 years have passed. There are a number of exemptions to the rule, including around the family home, which is exempt, and properties that have been inherited and then sold.

Of course if you are deemed to have bought a property solely with the intention of reselling it, then you will have to pay tax on the gains, no matter how long you held it for. 

The second change that was announced was around interest deduction. Investors could claim their interest on loan used for residential properties as an expense against their income from those properties. This reduced the amount of tax that was required to be paid. From October 1, 2021 any investment property acquired on or after the 27th March, 2021 will not be eligible to claim interest deductions against income. Properties purchased before March 27th, 2021 will be eligible for the next 4 income years, before this too is completely phased out.

Both of these changes do have exemptions for newly built homes, in an attempt to encourage investors to build rather than buy.  The government has indicated they will consult on the changes to interest deductibility before these are introduced.

This is big news for investors and for many it will require additional planning as to how the extra tax bills will be covered. The Inland Revenue have put together fact sheets which explain these changes in detail. If you have any questions or are unsure about anything regarding this new legislation then we encourage you to get in touch with us. We can help you put a plan in place to help combat the additional tax required to be paid, and to ensure smart cashflow from your investment.

Click here to read the IRD fact sheet for interest deductions