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By now most people know about the March announcements about removal of deductibility for residential rental property. In case you missed it, you can read my initial March comments here, and my follow up relating to the release of the June consultation paper, here. It caused a lot of panic but the general consensus among investors and other property experts I speak to is that it’s more of an annoying dripping tap than a catastrophic flood.
Today, just three days before the 1st of October when the interest deductibility cutoff takes effect, they have provided the draft legislation with what could be the full and final detail. It must be stressed that despite being much ‘more final’ than all previous information, this “Supplementary Order Paper” is still required to go through the process of parliamentary consideration and may change before it is made law. For the avoidance of doubt: this is still not final.
So – getting into it. How can you keep interest deductions, and turn off the dripping tap? Being completely upfront, there’s no magic bullet here (or should that be spigot?), and for a lot of people there will simply be no good option. But hopefully this helps lay out what choices are available. I suspect that #5 will be of some interest to many highly leveraged readers.
According to the draft law, you will be able to claim the interest on your property after 1 October 2021 in the following cases:
Your property is your main home – you can still deduct interest in a flatting situation, or where part of your home is used for your business.
Your property is overseas – these changes only apply to property in New Zealand.
Note that Bright Line does still affect overseas property, and overseas mortgages can create a whole different set of tax hassles get in touch for more info
Your property is commercial, or a farm – these are also exempt from these changes, which only target property intended for residential use
Your property is a “New Build” – a self-contained residence that receives a CCC confirming the residence was added to the land on or after 27 March 2020. Interest claims will be allowed in full for 20 years from the date of CCC.
Why does this start 27/3/2020, a year before the initial housing announcement? This is unclear. Why does it have a starting cutoff at all, rather than just allowing all properties full deductions for 20 years from CCC? Also unclear.
Your property is rented/leased to a social housing provider (either a registered community housing provider, Kainga Ora, or a few specific Public Service departments).
This could be a good option for a lot of landlords who want to sell but are trapped by Bright Line for a few more years
You’re developing the property – this does not exempt property developers as a group, but allows an exemption for land while it is in the process of being developed.
This occurs under either a land business exemption for land held as part of a development business, or a development exemption for developers who don’t meet the criteria of being a land business
Your property is partially related to any of the above – in such a case there is an apportionment exercise required, you can keep interest deductions on part of the property.
You are selling your property and paying tax on the gains
there’s no interest deductions when incurred, but you can ‘save up’ and claim when the property is sold.
It’s not yet clear whether the interest claim would be limited to the profit on sale, or if it would allow the full claim even if this exceeds your capital gains. The latter would be fairer. I expect the former.
You are also able to continue claiming the interest on debt secured over residential property but raised for other purposes – such as buying shares, commercial property, stock for your business, or paying a tax bill. In some cases it might be possible to shuffle the cards around and restructure some existing residential debt into a deductible purpose.
If you have debt where the purpose of borrowing is mixed and it can’t clearly be identified to a particular reason, you get to applied this to the deductible purposes first – a tax practice known as ‘stacking’, which basically acknowledges that many people would just end up restructuring as above, and takes the admin out of it.
There are also the following cases which most likely don’t apply to readers of this article, but I may as well throw them in there for completeness as they get to keep interest deductions too:
You are a significant company that is not a close company (majority control by 5 or fewer persons) and residential land is less than half of your asset base – the law explicitly exempts such entities on the basis of compliance difficulty.
You are Kainga Ora, a Maori Authority, a Council-Controlled organisation, or registered Community Housing Provider engaged in emergency/transitional/social housing – these changes explicitly exempt these groups.
Your property is kept for accommodation of your employees (or of your students if you are an education provider) – again, explicitly exempted.
The IRD have once again created some helpful summary sheets providing reader-friendly information on these changes. These are linked below:
Proposals at a Glance
Properties Unaffected by Proposals
Certain Entities Exempted
Exemptions for Property Development and New Builds
How Deductions are Affected
Changes to Bright Line
And also the full Supplementary Order Paper, which is very long, and not in the least bit reader friendly.
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