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Government avoids 'over-taxing' property investors by allowing interest deductions on taxable sales

Property
Government avoids 'over-taxing' property investors by allowing interest deductions on taxable sales

Inland Revenue says the Government’s draft interest deductibility rules ensure residential property investors are not "over-taxed".

Under the proposed new rules, most investors will no longer be able to write off interest on their mortgages as an expense when paying tax annually.  

But, if investors are taxed when they sell their property, under the bright-line test for example, they will be able to deduct this interest.

The Government confirmed this on Tuesday when it released draft legislation outlining the rules. The rules are due to start being phased in over four years from Friday, ahead of them being passed into law in early 2022.

Example

Let’s say an investor buys a property today for $1 million and sells it in eight years’ time for $1.5m.

Because they on-sold within 10 years, they would have to pay income tax on any gains under the recently extended bright-line test.

So, they’d take the $500,000 gain and subtract any expenses to get the taxable amount. One type of expense they would be able to subtract is interest on their mortgage.

If, over the eight years they owned the property, they spent $100k on interest and $100k on other expenses, they’d have to pay tax on $300k ($500k gain - $200k expenses).

So, they’d be able to deduct all their interest in one go when they pay tax on their sale, even though they couldn’t deduct this interest every year for the eight years prior.

The amount of interest the investor would be able to deduct at the point of sale would be limited to the gain on the sale. 

The Government considered banning interest deductions at the point of a taxable sale, but decided this would be an overkill.  

Chartered Accountants Australia New Zealand tax lead John Cuthbertson said it comes down to timing. Investors will still need to consider whether they have the cashflow to pay more tax annually, even if they know they can use interest payments to reduce their tax bill when they sell their property. 

What if an investor suffers a loss when they come to sell?

Let’s say that $1m property in the example above was only sold for $150k more than it was bought for, and the interest expense was still $100k and other expenses $100k. The loss on that sale would then be $50k ($150k gain - $200k expenses).

This loss would only be able to be offset against the investor’s property-related income for tax purposes - not all their income (eg income from wages, shares, etc).

Inland Revenue’s warning

Inland Revenue, in its Regulatory Impact Statement prepared for the Government, said the interest deductibility rules would “require taxpayers to retain comprehensive records of interest expenditure incurred over the period of ownership of the property for a longer period than otherwise required to by law”.

“Investors who know that the sale will be taxable will keep all records to ensure they can claim their interest deductions. For investors who are not expecting to be taxable on sale, best practice may be to maintain comprehensive records throughout the period of ownership,” it said.

Inland Revenue, which opposed the interest deductibility policy entirely, said it would result in high compliance and administration costs for an estimated 250,000 taxpayers and erode the coherence of the tax system.

Background

The removal of interest deductibility means that from October 1, 2021, interest will not be deductible for residential property acquired on or after March 27, 2021. For properties acquired before March 27, 2021, investors’ abilities to deduct interest will be phased out between October 1, 2021 and March 31, 2025.

New builds are exempt from the interest deductibility rules for 20 years from the time a Code of Compliance Certificate is issued. For more on this, see Tuesday’s story.

Under the bright-line test, investors need to pay income tax on any gains made by on-selling houses within set timeframes.

For investment property bought on or after March 27, 2021, the “bright-line” period is 10 years. For property bought between March 29, 2018 and March 26, 2021, the period is five years, and for property bought between October 1, 2015 and March 28, 2018, the period is two years.

Investors who buy/bought new builds from March 27, 2021 only need to pay income tax if they on-sell within five years.

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46 Comments

GST and income tax already payable, Abt 40-45% of profit. Most of these are developments or short term renovations and I pay 7-8% on such projects. Not allowing deductibility would have added yet another increase the new build prices. 

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2

This, ladies and gentlemen, is why rich people have accountants.

 

And why IRD hates Grant Robertson.

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15

Most of these are new builds. Would you like new houses to be 20-40k more expensive or was this just an "anything that doesn't stab property people in the face is bad for society" comment.

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1

Just start a school and enroll all your tenants as students- course topic your choice.

Problem solved.

Be creative.

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5

Labour at it's best for deceiving and disappointing.

Finding ways to giving free pass to rich investors, as already informed by finance minister there is still scope for property price to go up. SHAME

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4

This was already signaled in the original released information in March. You must not have read beyond the catchy headlines. 

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4

The fact will remain unaltered, giving free pass /advantage to investors so that there hard work & effort will not be over taxed.

 

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3

They're spending 2-3 years building 6-8 townhouses. It's multimillion dollar risks and long timelines. Hardly a tax holiday.

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3

Oh boy, news from the coal face. An off the plan property I bought back in early August this year is now 200k more today. I had to check to believe it when my agent called me and found it to be true on TM.

Summer hasn't even started. It's beaten my own optimistic predictions.

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3

Wow.  Thats amazing.  It's going to be worth two million more in a year.

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10

You sound like sour grapes mate. I'm reporting what I'm seeing. If you don't like the truth then that's your choice.

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5

When did I say I don't like "the truth".  It's fantastic.  It's an 1800% per year annualised gain.  What suburb is it, I want to join in on the action!  What could possibly go wrong.

 

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9

The more the govt dabs into housing the higher the prices go.

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9

Oh man you sound awful

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2

I'm not boasting. I'm telling you the truth.

Even I'm shocked. This market is nuts.

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5

Congrats, what suburb is it in? 

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Fictionville

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8

See, you just showed your cards. You can't accept that people are making money in real estate.

Last year I built (as in I bought) and sold a house for 250k profit in 8 months. This time my new built hasn't even started but prices in the area are up. For the same house unbuilt off the plans it's asking 200k more. So this is how insane it is. It's in a new subdivision in Auckland.

You choose what you want to believe. Take a look at TM prices and tell me I am wrong.

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5

Uh huh.  So which suburb?

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5

Interesting that some people cannot answer a basic question. One has to come to the conclusion that there are people on here making shit up to deliberately antagonize others.

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2

So the 35% increase in house prices is fake news? Fill your boots. 

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FWIW I'm pretty sure every other time you've said this you made $260K. Just reminding you.

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2

Emphasis on "asking", lol

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Signed a 3bed townhouse turnkey in Jan 2020 for $900k settled October 2020 valued at $1.17m. Cray cray

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4

Well done thinktank!

What's wrong celebrating good investment outcomes?

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2

Nothing wrong with good investment outcomes. Speculation being enabled by governments, a little less so...

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4

Anyone with property has made money in the last few years, especially the last year, thanks to the RBNZ and government.

But most of us don't crow about it.  Just because it's true doesn't mean you have to tell everyone about it.  I may (or may not) have a Ferrari but I don't have to tell everyone I meet that I do.  They'll think I'm a dick, and they'd be right.

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5

See the chart half way down the page of Auckland Median Prices. Prices in Auckland have been flat until Covid19 and its sidekick the Reserve bank delivered the Property market a bonus around Jan 20.

https://www.opespartners.co.nz/property-markets/auckland

Money in any Asset class had the same or greater run up.  What happens when we get an even deadlier Covid Variant prices will go to the moon, unless half of us die.

 

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You don't really expect to get such a response on a web site like this do you? You know a web site about money. It's not Stuff after all. I got the same treatment years ago when I was trying to point out that it was a good idea to invest in property, especially Auckland. I thought I had made an honest and accurate informative comment and all hell breaks loose.

 

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5

Yes but Flyer seems to post his story at every opportunity now and it’s too antagonistic. He’s being a WUM. 

And no I am not a property Bear or DGM. 

 

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3

Call me what you want @Lord, that's the reality. Obviously you are sitting on the sidelines wanting people to fail. 

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2

@Zachary, good to hear. People can't seem to accept the facts on the ground. I wonder if they just want to hear about all the losses and how poor people are to make themselves feel better.

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1

Flyer, who is the developer?

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These tax changes will work only at the margins of the house market. Demand drives the prices, not other things. Period.

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5

With investors and a steady pool of new NZders there is infinite demand. The trouble is we actually do have people dying here already because we cannot supply demand for stable accessible (as in can enter through the door and use the toilet in the home) affordable housing. Instead the govt continues to put money on odds that investors should always win above home owners. But there are many people who through no fault but their birth investors would never rent to and the govt refuses to allow them to have access to state housing because of supply shortage. It was their birth that condemned them but it will only be their deaths that is the only exit from the predicament. The sad fact is the politicians, housing managers, and most investors are completely ok with that.

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4

Where is the steady pool of new people coming from?

 

Everywhere I look, everything I hear, people will be leaving from next year when borders open. Overseas expats won't can't back to pay higher everything and earn less. 

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4

Just like all those people who moved to Canada after Trump won

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Incorrect...expat here, coming back next year, or sooner if possible.

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Key for property investors is volume of transactions now. Back in January buy and hold was a viable strategy but the new rules mean that is taxed far more heavily than buying, staging and flipping. If you can flip three properties a year you will be far better off than any mug who rents their property to a young family who can’t afford to buy yet and gets taxed as a thank you.

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3

That's not investing though is it? It's flipping.  With a dollop of speculation thrown in.  I have no problem with that, but just pointing out it's not investing.

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So, two economic calculations:

  1. HODL for a day after the BL period, take the full untaxed CG and eat the interest, or 
  2. Sell within the BL period, claim all interest to offset against the CG, and pay tax on the remainder 

Do I detect a perverse incentive to take up expensive interest offerings?

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Do I detect a perverse incentive to take up expensive interest offerings?

You'd pay less tax in that scenario but you'd also make less after-tax profit. So low interest rates would still be preferred.

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The socialist communist party continues with its broad anti business regime against mining, farming, tourism, property, gas and oil exploration etc etc.

Which industry will be next as it strives to control and own everything and make all its citizens slaves and serfs in their own country whilst dealing out our daily allowance.

No one is allowed to get ahead, we must all be peasants to the great leader on her crusade to become head of the United Nations and rule the world.

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2

Am not talking about merits of good or bad but this has been JACINDA ARDEN government, take a step forward and than get cold feet to retrace back / dilute - end result is what it should have been.

Current democratic system is a farce as is controlled and is by the elite, to the elite and for the elite.

 

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It's what she originally signalled. Development finance on new construction is still a deductible business expense. Judging by the comments on here people read the stupid click-bait headline and go straight to the comments section. 

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Since depreciation is no longer deductible, perhaps the same treatment should be accorded imputed depreciation.

I'm inclined to think that, now that interest is no longer deductible, deductibility should be re-introduced for depreciation. This would help with the landlord's cash flow during his tenure, even though it might lead to excess depreciation being taxed when the property is sold, and also could be a prophylactic against falling house prices should they eventuate

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