Property Tax Changes

We are pleased to bring you the latest updates on the recent property tax changes that have been passed into law.

The main tax changes are;

• Interest deductibility for residential property
• Returning the bright-line test to two years
• Removal of depreciation for commercial buildings.

Interest deductibility of residential investment properties is to be phased in

Mortgage interest incurred for residential investment properties will be phased in over the next two years.

• 80% of interest will be deductible for the 2024-2025 income year• 100% of interest will be deductible for the 2025-2026 income year
• If the property is a new build, 100% of interest remains deductible.

The status quo will remain for the 2023-2024 income year (100% interest deductible for a new build, 50% for residential rental properties acquired before 27 March 2021 and for (non-new) properties acquired on or after 27 March 2021, no interest is deductible).

Bright-line reduced to two years

The bright-line test, designed to capture tax on gains from sale of certain residential rental properties, has been reduced to two years.

The two year bright-line will apply for properties sold on or after 1 July 2024. In most cases, if a binding contract for sale was entered into on or after 1 July 2024, the two year bright-line will need to be considered.

If the binding contract was entered into before 1 July 2024, the 10 or 5-year bright-line needs to be considered.

There are specific rules that apply to “off plan” purchases, so it is important to seek expert advice on any property transactions.

Main home exclusion

The main home exclusion from the bright-line is being changed from the current calculations based on the time that the property is used as the main home and the land area of such use.

From 1 July 2024 the exclusion will apply in full if more than 50% of the time and more than 50% of the land area of the property has been used as the main home.

Be aware that if the property does not meet the main home exclusion, the gain on the sale may be taxable.

Example:

John entered into a sale and purchase agreement to acquire residential land in late 2021 with the transfer being registered on the title on 5 January 2022. He used the land as a rental property. He enters into a sale and purchase agreement to sell the land on 20 June 2024. The current 10-year bright line test will apply to tax the disposal of the land. The land was acquired after 21 March 2021, and the bright-line end date for the land (being the date the sale and purchase agreement was entered into), was prior to 1 July 2024.

Mike purchased a residential rental property with a bright-line start date of 5 January 2022. He enters into a contract to sell the property on 27 July 2024. Because the bright-line end date for the land is after 1 July 2024, and the property has been held for more than two years, the disposal will not be taxable under the new 2-year bright line test.

Removal of depreciation on commercial building

Depreciation for commercial buildings with an estimated life of 50 years or more, will be set at 0% from 1 April 2024 onwards (application for the 2025 income year)

Commercial fit out that is not part of the building structure can continue to be depreciated separately, so it is important to review this when negotiating agreements

Residential buildings cannot be depreciated for tax purposes.

It will be important to review the impact of the removal of depreciation on future provisional tax payments.

Residential property tax losses

The loss ring-fencing rules still apply for residential property losses.

Residential rental expense deductions can be claimed up to the amount of residential rental income earned in a year, including bright-line income from the sale of a property. However, any excess deductions cannot be offset against other income such as salary or wages. Excess losses are carried forward to be used against residential rental income in the future.

Rollover relief

Rollover relief is a concession that treats the person acquiring the property at the transferor’s cost price and the original acquisition date. Therefore, if the concession applies, bright-line tax may not be triggered nor the brightline acquisition date reset.

Further rollover relief is now available for the transfer of property from 1 July 2024.

In addition to existing rollover relief, bright-line property can be transferred without triggering tax where:

• The transfer is to an associated person (as defined in the Income Tax Act) and this association has been in place for two years
• If the transfer is to a trust, all beneficiaries of the trust have been associated with the transferor for two years.

Example

Sarah owns residential land with a bright-line start date of 4 June 2024. The land has a cost of $750,000. In December 2024, Sarah gets advice from her lawyer that it would be beneficial to transfer the land to her family trust. She has been a settlor, trustee and beneficiary of the family trust since it was established in 2020.

As a settlor and beneficiary of the family trust, Sarah is associated with the family trust. Sarah has been associated with the trust for more than two years. Therefore, a transfer of the residential land to the family trust will qualify for rollover relief. Sarah will be treated as having transferred the land to the family trust for its cost ($750,000), such that no tax consequences will arise for her under the bright-line test. The trust will be treated as having acquired the land on 4 June 2024 for $750,000.

On-line Market Operators – GST changes

New listing intermediary GST rules have been implemented for the supply of short-term or visitor accommodation through online marketplace (such as Airbnb) which may affect property managers and landlords that offer short term accommodation. These rules mean GST is charged whether the accommodation host is GST registered or not and changes who accounts for the GST to the Inland Revenue.

These rules are complex, and we suggest if you are affected by these changes (including accommodation hosts considering GST registration) you consult with your accountant or a tax specialist.

In summary, while these property tax changes bring welcome relief, they also introduce complexity that requires careful consideration. We strongly recommend consulting with your accountant or tax specialist to navigate these changes effectively and ensure compliance with tax obligations.

Disclaimer

This information is for general education purposes only. It does not cover all situations and circumstances and should not be taken as direct tax advice. If you are looking for specific help, please contact BVO (Stephen Rutherford or Julia Owens) to provide specific advice.

Harcourts value collaborations with trusted businesses like BVO, to contribute valuable content to Property Management Focus. It’s through these relationships that we can ensure our audience receives the most relevant and impactful insights. Thank you again to BVO for their valuable contribution.

Please visit www.bvo.co.nz for more information.