Hot on the heals of changes to the Residential Tenancies Act and Healthy Homes Standards the Government has announced new measures to tackle the housing crisis.

What are the changes?

The market has booming for some time and in an attempt reduce the investors buying and favour more towards first home buyers, the Government has decided to extend the bright-line test to 10 years and altogether remove interest tax deductions on rental properties.

The changes also include $3.8bn for infrastructure development to accelerate house building; the lift of income caps on First-Home Grants and Loans; $2 bn loan to Kāinga Ora to scale up land acquisition; and the extension on the Apprenticeship Boost scheme to help grow construction workforce.

The Housing package is designed to increase the supply of houses and putting some controls in place on the unsustainable growth rate of house prices (removing interest deductions for investors and extending the bright-line test). These measures are designed to discourage speculators and to make property affordable again for first-home buyers

Bright-line test Extension

The Government has passed the new bright-line test rules last week under urgency. The investors will now be taxed on any capital gains if the residential property is sold within 10 years (previously, 5 years). For many property investors, that tax rate could be about 33 per cent or 39 per cent of the sale, depending on their income and how much the house is sold for. Any investment property with a settlement date after March 27 2021, will be hit by the new rules.

Interest Payments Tax Deductions

The most surprising change was the Government's decision to completely eliminate interest rate tax deductions, which investors can currently claim on properties. This means investors can't offset the cost of the interest they pay on their mortgage against their tax bill. This change will take effect from October 1 2021, for properties bought after March 27. For properties purchased before that date, deductibility will be phased out over the next four years. There are a number of possible exemptions including:

new builds
non-housing business purposes
property developers & builders
if money is borrowed on or after March 27 to maintain or improve the property bought before March 27, it will be treated the same as a loan for a property acquired on or after then

Rent Increases

The Government is now proposing to limit rent increases to once every 12 months per rental property (not tenancy). This means that if you were to re-let the property to new tenants, you would be restricted to lift the price up if there have not been 12 months since the last rent increase.

Possible Consequences

In the short-term, with changes being phased-in over several years and interest rates at an all-time low, the property investors with existing properties may not feel the full effect of the proposed changes. But the changes are likely to have a significant impact on investor's cash flow in the long-run. Scrapping the interest deductibility will add a considerable amount to the cost of providing rental property. This will discourage new investors from coming into the market and/or build their portfolios. Some existing residential landlords might struggle to hold lower cashflow properties or properties with high mortgages. Without interest deductions, investors will need to see a higher return rate to justify their property investment. This may lead to higher rents (although they will be restricted by the tenant's ability to pay). By the next election in 2023, it will be clearer if these changes are working and helping to address the housing crisis. But if the rules are not working, the Opposition may use this as an opportunity to have their say and propose scraping them.

If you have any doubts or questions about the impact of these changes don’t hesitate to speak with us directly.

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New investment property tax changes