Removal of tax deductibility on interest expenses for residential rental properties is adding to the financial burden of landlords. The move is expected to add $1 billion to government coffers.

Landlords are under the pump.

Historically high-interest rates combined with a raft of recent changes, including the “pseudo capital gains” tax via the bright-line test, healthy homes standards, and changes to depreciation rules, are changing the dynamics of property investment.

Add to that the staggered removal of tax deductibility on interest expenses for residential rental properties purchased before March 27, 2021. The benefit will no longer apply from April 1, 2025. Properties purchased on or after March 27, 2021, are ineligible for interest deductibility, though new builds are excluded from these rules.

Tax grab

The change will see the government reap $1 billion over four years, according to Revenue Minister David Parker.

The National Party has promised to reinstate tax deductibility on interest expenses if it is voted into power later this year. The ACT party has committed it would reverse Labour’s  interest deductibility change and abolish the bright-line test completely.

Before the Labour government introduced the new policy in 2021, landlords could claim back all the interest cost of a home loan against rental income. For example, a landlord with a property that earned $30,000 in rent but incurred $20,000 in interest payments would only be taxed on $10,000 of rental income.

The full $30,000 will be subject to tax by March 31, 2025, when the new rules have been fully implemented.

Ignoring core principles

Pundits say the policy defies a core principle of most tax systems, where people are taxed only on their profit.

It’s a point often ignored by commentators, who say the policy change is simply closing a loophole unavailable to people living in their own homes. However, owner-occupied homes do not generate income.

Rent increases will partly offset rising costs

Interest deductibility changes will result in more loss-making rental properties.

And that’s despite some landlords increasing rent to offset rising costs.

Rent prices in New Zealand reached a record national average high of $600 per week in February, according to Trade Me’s latest property data.

Trade Me Property’s sales director Gavin Lloyd said weekly rent in Aotearoa had jumped by 4% or $25 compared to February 2022.

Wellington City was the most expensive area to rent, with a median weekly rent at $695. Auckland CBD was slightly cheaper at $620 per week.

Lots of ‘Don’t knows’

Minister Parker rejected an assessment from the National Party that the newly fleshed-out interest deductibility rules would inevitably push up rents.

However, when questioned in parliament about the specifics of his policy, Parker didn’t say much, if anything, prompting the National Party to suggest that in his haste to rush the policy Parker hadn’t done his due diligence.

This from the National Party website:

“When asked whether a Mum and Dad who rent a home to their own kids while they’re at university will be able to deduct mortgage interest, Minister Parker didn’t know.

“When asked if an extension onto a property would be considered a ‘new build’ and therefore exempt from the rule, Minister Parker didn’t know.

“When asked if a farmer would be able to deduct interest from a mortgage on farmland with a rental property on it, Minister Parker didn’t know.”

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