Recent tax changes will impact residential Investment property investors. Here are some tips from experts on how to make the most of your investment properties.
What’s changing:
For properties acquired on or after 27 March 2021:
- Legislation has passed that extends the bright-line test from five years to 10 years on residential investment property.
- The Government intends for the bright-line test to remain at five years for new builds and will be consulting on what a new build is soon.
- Legislation has passed that introduced a ‘change of use’ rule. If the sale of your property is subject to the bright-line test, and you don’t use a property as your main home for 12 months or more, you will be required to pay income tax on a proportion of the profit made through the property increasing in value.
- The Government has proposed that residential property investors will not be able to offset the costs of the interest they pay on loans to purchase residential property as an expense against their taxable income. A consultation will be held about this, with any law expected to come into effect from 1 October 2021.
For properties acquired before 27 March 2021:
- The previous bright-line test for five years will continue to apply for properties acquired before 27 March 2021.
- The government has proposed that interest on loans for investment properties acquired before 27 March 2021 can still be claimed as an expense, but the amount will reduce each year until it’s completely phased out by the 2025-2026 tax year. A consultation will be held about this.
Tips for landlords
Claim for everything you’re eligible for
Dan Hellyer, Partner, Deloitte Private, says if you look at an investment property as an income-generating asset not much has changed. “Although being able to claim the funding costs is being phased out, you can still claim ordinary operating expenses. These are the costs that are incurred in generating rental income.”
Sharon Cullwick, executive officer, New Zealand Property Investors’ Federation, says sometimes people don’t bother claiming for small expenses, like vehicle costs when they travel to their rental property. “But it all adds up, so claim for everything you’re able to.”
- repairs and maintenance (but not renovations that substantially improve the value of the property)
- professional services fees, like accountants, lawyers or property managers
- rates and insurance
- mortgage repayment insurance
- vehicle and travel expenses when you travel to inspect your property or do repairs
- depreciation on capital expenses, like whiteware, appliances or heat pumps
- legal fees involved in buying a rental property, as long as the expense is $10,000 or less.
If you’ve taken out a loan for a business purpose, eg to buy a new business asset, and the loan is secured against a residential rental property, you’ll still be able to claim the interest as an expense.
Take a close look at your portfolio
Hellyer says rental properties still make sense as an investment for many people. “New Zealand needs rental housing stock as much as ever. From a diversified portfolio point of view, it’s still a great step for people to consider and will remain a feature of investment portfolios for middle New Zealand.”
He says now is a good time to take a good look at your portfolio, so you’re really clear about the costs associated with each investment property you own and to make sure you’re meeting compliance requirements for each of them. Get professional advice to see what would makes the most sense for your circumstances.
Cullwick says it’s important to consider what costs could be in the next few years rather than just concentrate on what they are now. “If you bought your property before 27 March this year, the ability to claim your interest as an expense may be phased out over the next few years. So your costs may rise over that time. Interest rates are also at historic lows and could rise in the next few years.”
Things to consider include:
- a property’s ability to generate an income
- how much your costs will rise as interest deductibility is phased out
- what your current interest rates are and how long you’ve fixed them for
- if maintenance and repairs are up to date
- if your properties meet healthy homes requirements
If your tenants are having trouble paying rent, let them know they may be eligible to apply for a one-off rent arrears payment from Work and Income.
Buy for yield rather than capital gains
In the past few years, some investors have been chasing capital gains, and have been willing to run their rentals at a loss in the expectation that house prices will rise, says Cullwick.
She says this can be a risky strategy as property prices won’t keep rising forever and suggests investors should focus on getting a good yield on their property. You can assess yield by calculating how much income the property generates (after paying the mortgage and other expenses) and dividing this number by the value of the property. This figure – usually around 5% – will help you understand the value of the investment, compared with other rental properties or investment opportunities.
“Make sure your property can pay for itself,” says Cullwick. “Don’t have a property that you need to dip into your own pocket for and pay $50 or $100 a week for the next 25 years.”
Consider new builds
If you’re looking to add to your property portfolio, but you’re not sure how long you intend to hold a property for, then consider new builds. Not only will maintenance and repair costs be lower, but it’s been proposed that the bright-line test will remain at five years for new builds.
Again, Cullwick says it’s important to consider yield when buying a new build. “The numbers have to make sense and the property has to pay for itself.”
Consultation is ongoing about the exact definition of what a new build is. “You might buy an old house, demolish it and build a new one in its place,” says Hellyer. “While you and your bank would probably consider that a new build, Inland Revenue is still consulting to determine how the new legislation will deal with such a situation.”
