Property investors targeted in Government’s latest announcements

The Government has announced significant changes targeting property investors.  These changes have significant tax impacts and could cause long-term loan serviceability issues.  In summary these changes include:

• The extension of the current 5 year bright-line test to 10 years. This means that investors will be subject to income tax on property gains if they sell residential rental properties within 10 years of purchase date.  New build investment properties however are excluded from this tax net, with the bright-line test for these properties remaining at 5 years.
• Removal of interest deductibility for residential investments from 1 October 2021 for properties settled after 27 March 2021, with a view that this will capture all residential rental properties by 2025, although there may be an exclusion for new builds here which is yet to be determined. If you acquired a residential rental property prior to 27 March 2021, you will still be able to claim interest as an expense against your rental income but this will be phased out over the next four income years, with only 75% of interest able to be claimed as an expense between 1 October 2021 to 31 March 2023, 50% claimable between 1 April 2023 to 31 March 2024 and 25% between 1 April 2024 to 31 March 2025.  After this time, no interest will be able to be claimed as an expense for tax purposes.
• The consideration by Government of putting an end to interest-only mortgages.
• The Reserve Bank looking to introduce debt-to-income caps for mortgage lending.

 

What do these changes mean for property investors?

While the detail of these changes is yet to be released, on the surface it looks to make residential rental properties a far less attractive investment strategy, with a pseudo capital gains tax effectively capturing all residential property sales for properties sold within 10 years of purchase.

The change to the interest deductibility rules will hurt residential property investors, with tax now payable not only on net profit but on a greater proportion of rent received since interest is taken out of the equation.  In fact, for many property investors running their rental properties at a loss with interest costs outweighing their rental income, these changes will mean these investors will now have to pay tax where they may previously not have paid the Inland Revenue at all.

While one could argue that the impact may be kept at a minimum at present with interest rates remaining so low, this requirement to pay tax on a higher taxable income portion moving forward could push some investors to sell their properties, especially if interest rates then rise and they are covering higher interest costs as well as paying more income tax.  We may see the supply of residential properties start to flood the market as a result.  We may also see a hike in rent prices as landlords adjust to the increasing costs of holding residential rental properties, although the Government will be tweaking the rules to ensure that rental increases can only happen once a year per property rather than per tenant.

Speculating on what the future of the property market might look like, it may make commercial investment properties even more attractive, with no indication at present that the same interest deductibility restrictions are being applied to these properties.  Until more detail comes to light, this will be an area to keep an eye on.

 

Help for first-time home buyers extended from 1 April 2021

The flip-side of the Government’s announcements targeting property investors is that first-home buyers are being gifted greater assistance by the Government to get onto the property ladder.  In summary, the changes are:

• Income caps for the Government’s First Home Grants and First Home Loans will be increased from $85,000 to $95,000 for individual buyers and from $130,000 to $150,000 for two or more buyers.
• Property price caps for first home purchases to be eligible for the grants and loans available are also being increased, with new build caps moving to $700,000 in Auckland, with Wellington and Queenstown following closely at $650,000, Hamilton, Tauranga, and Nelson at $600,000, and Christchurch and Dunedin at $550,000. The cap for the rest of New Zealand is $500,000.

 

What do these changes mean for first-time home buyers?

In theory, there should be a slow increase in the rate of rental property values increase as they become less attractive investment vehicles for investors.  This should help first-home buyers to buy houses, with the grants and loans aiding this strategy.