RESIDENTIAL PROPERTIES – INTEREST DEDUCTIBILITY & BRIGHT-LINE

The rules regarding the Bright-Line test and investors being able to claim interest against residential rental income are being updated. These rules will apply to any house, apartment, or other such building that a person could live in. It does not matter whether the property is rented out long-term, used for short-stay accommodation, or even left vacant. The main changes are:

Interest Deductions:
New Builds – a property is considered a new build if it has received its Code Compliance Certificate (CCC) after 27 March 2020. In these cases the investor will be able to continue to deduct interest paid on the property loan against rental income for 20 years from when the CCC was issued. Additionally, subsequent owners of the property will also be entitled to treat interest as a deduction against rental income up to the 20 year time period.

Other Property – Purchased prior to 27 March 2021 – interest deductibility will be reduced to nil over a 4 year period (further details in our May 2021 newsletter).
- Purchased after 27 March 2021 – interest deductibility is only allowed up until 30 September 2021.

Reminders:
The existing residential rental loss ring-fencing rules still apply – if net rental income results in a loss, the loss will be carried forward to offset future rental income.

Commercial property (that is unrelated to the provision of accommodation) – interest is still able to be claimed against income. In addition it is confirmed that when borrowing for non-residential property purposes (e.g. business assets or commercial property), and borrowings are secured against a residential property, interest deductibility will not be impacted.

New builds for interest deductibility refer to March 2020, for bright-line (see below) the cut off is March 2021.

There are also other points covered by the proposals, which will be finalised once the legislation is enacted.

The Bright-line Period:
The bright-line property rule means that if you sell a residential property (excluding the family home) that has been owned for less than a specified period, any gain made will generally be taxable. The bright-line period that applies has been clarified:

Property purchased between 29 March 2018 and 26 March 2021 - subject to 5 year bright-line period
Property purchased on/after 27 March 2021 - subject to 10 year bright-line period
New builds purchased after 27 March 2021 - subject to 5 year bright-line period

Going forward residential property owners will need to monitor ownership periods to ensure they meet their tax obligations. IRD automatically receives information on the timing of all residential property sales and will request a “please explain” if they consider tax obligations have not been met.