Tax Update for Residential Property Investors

Tax Update for Residential Property Investors

To cool surging house prices and level the playing field, rental property owners are about to face a number of issues through the combination of new IRD policies and law.

So far, we have seen the removal of depreciation on buildings, the introduction of the 2 year bright-line rule then the extension to 5 years.Now there is a proposal of ring-fencing losses, proposed capital gains tax and scrutiny by the IRD of repairs & maintenance claims.

Bright-line rules only apply if “first interest” in residential land acquired is on or after 1/10/15:

  • - 2 Years – first interest acquired 1 October 2015 – 28 March 2018
  • - 5 Years – first interest acquired on or after 29 March 2018

It is important to note that the date a person acquires an estate or land is not the same as the start date for the bright-line period.A person normally acquires an estate or interest in land when they enter into a binding Sale & Purchase agreement even if some conditions still need to be met.Check out our blog in Bright-line rules for more information.

Some caution also needs to be exercised when restructuring as this could bring the property in to the bright-line rules or extend it to 5 years.

Ring-fencing of rental losses are likely to take effect in 2020 starting with 50% of losses ring-fenced then 100% from 2021 income year.Ring-fencing means that losses from a trade can only be off-set against income from the same trade. Under the proposal, residential property investors will no longer be able to offset losses from their residential properties against their other income (for example, salary or wages, or business income), to reduce their income tax liability.The good news is a property investor can off-set a loss against another profitable property or carry the loss forward and off-set against future profits from any property they own.

Ring-fencing of rental losses applies to asset rich entities where more than 50% of the assets are residential rentals.Therefore, it is possible to combine assets in the one entity to ensure it is not residential land rich.Ring-fencing doesn’t apply to a main home, land developing related business (they are already taxable on sale) or properties which are subject to mixed use asset rules, e.g. holiday homes.

Currently there is a Tax Working Group (TWG) that is examining the structure, fairness and balance of New Zealand’s tax system. As part of this process the TWG are considering a capital gains tax (CGT), this would involve either taxing capital gains on a realised basis (when you sell) or the alternative is the risk-free rate of return method (taxing a % every year). We believe the most likely outcome would be tax on realised basis. Members of the tax working group have stated publicly that the new legislation will be enacted before the next election but won’t take effect until post-election. Any capital gains tax is likely to exclude the family home. We will be keeping an eye on this policy as it progresses, if it does go ahead, we will be particularly interested in how they enact this policy. The interim report suggests any assets owned on the ‘effective date’ would only be taxed on the gain between the ‘effective date’ and the sale date. Which means you won’t be taxed on gains prior to the ‘effective date’, however, this would mean you would need to have the value of your property at the effective date. Watch this space for further updates.