BUSINESS ADVICE • 13 MAY 2022 • 7 MIN READ

Residential rental properties - has the dust settled?

SECTIONS

Taxing gains on the sale of property (Brightline)

Interest on residential rental property loans

Recently confirmed

Still under discussion

References and reading

Summary

Who are Beany?

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)

New Zealand doesn’t have a capital gains tax, but profits from selling some assets can be taxable in some circumstances.

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’.

Who are Beany?

We’re an online accounting firm that is always right here for you, your accounting pain relief. The most advanced technology lets us work way more closely with you than a normal accountant would.

We have a dedicated team of remote accountants to take care of your business no matter where you are, so you can focus on growing your business. We take out the ‘fluff’, break down the barriers and get things done. Looking out for you is what we are all about. Get started for free today.