Lately, Propellor has been approached by an increasing number of concerned property investors dismayed about the new tax laws on their existing rental properties.
Before the Labour government introduced the policy change, it was possible to claim back all the interest cost of a home loan against the rent received on a property.
The new interest deductibility rules which removed the ability of investors to offset interest paid on home loans against rental income on existing properties,
were introduced in 2021, but were being phased in over several years. Their concern and frustration is completely justified. You should be able to claim expenses on income earned.
If the policy remained in place, it would have a significant impact on many investors.
Most of my clients are typical mum and dad New Zealanders wanting to get ahead and realise they cannot rely on a government pension to give them any quality of life through retirement.
This country needs rental accommodation. There is only one group that can provide that with a burden to the tax payer and at a level that this country demands. The shortage is chronic. So it is doubly baffling that this group is penalised as it is.
So let’s look at what it could mean on an average priced investment….say you have a $500,000 mortgage on a property. Once the new policy is fully implemented it could cost you an extra $6000 in tax each year.
Also, older properties need 40% + deposit and if they are sold within 10 years there is tax to pay on any profit you may make.
New Build properties are exempt from these interest deductibility tax changes. if your property received (or will receive) a Code Compliance Certificate (CCC) on or after March 27, 2020, you won’t come under these new rules. This includes New Builds bought off the plans from a developer. This really makes a difference to your cash flows!
New Builds Require Lower Deposits. Investors need a smaller deposit to purchase New Builds compared to existing homes.
Under the Reserve Bank’s LVR rules, investors wanting an existing property require a 40% deposit, whereas most banks will approve an investor’s mortgage application for a New Build with just a 20% deposit. This means if an investor wants to buy a $600,000 property, they will only need a $120,000 deposit if it is new. However, if it is an existing property they will require $240,000 as a deposit to purchase the same property.
New Build property can be sold after 5 years without attracting tax on the profits.
Maintenance and repairs. Because everything within a recently built property is brand new, investors avoid any unexpected costs. With an older property you may have to repair the roof,
replace fixtures or fittings and that costs. So, what could seem a bargain to start with may end up giving you a negative return and large repair bills.
I think we will see more and more investors selling off their older properties and opting fore new builds. I call it culling the herd – which is a healthy way to manage your portfolio