Property Investment Tax Changes - What You Need to Know

March 23, 2021

The Government has announced changes to how property investments are taxed - and while some of the detail is yet to be determined, we wanted to get you up to speed with how it might impact you, your current investment property and any future investment plans.

While there’s no need to panic, it’s important you know how the changes could affect your cash flow.

If you’re an enable.me client who has bought or intends to buy a new-build property, the impact of these changes is likely to be minimised, because new-builds are exempt from the changes.

The following is intended solely as a guide - if you’d like to discuss how the changes might affect your specific situation, please contact your accountant.

The key changes

1)       The ‘bright-line’ test increases from 5 years to 10 years. That is, investment properties bought after the 27th of March 2021 will be subject to tax on any capital gain if they are sold within 10-years (up from the current5-year period). However, ‘new build’ properties will be exempt and will remain subject to the current 5-year window.

2)     Interest costs to cease to be tax deductible. Ordinarily, you’d subtract your insurance, maintenance, interest, and other costs from the income you get from renting out your property, and you’d pay tax on the profit. These changes mean you remove interest from that equation, so that will increase your profit in the eyes of the IRD, and you’ll be paying tax on a higher amount. This is likely to mean you’ll have more tax to pay, which will most likely be funded from your personal cash flow. For properties bought after March 27th you won’t be able to claim interest costs at all from October the 1st. For properties you already own this ability will be phased out over the next four years, starting in October. However, ‘new build’ properties will be exempt from these changes, subject to consultation determining the parameters of what constitutes a new build.

The impact in dollars and cents

If your property isn’t classed as a new build and you already own it, how much of its interest cost you can claim will start to diminish over the next four years.

While your exact tax liability is something you need to talk to your accountant about, based on the scenario below, of $700,000 of investment property debt at 3% interest, we estimate the approximate annual cost to be between $735 - $1,023 in year one, and between $5,880 and $8,190 by the time it’s been completely phased out.  

Please note this scenario doesn’t take into account any losses that can be carried forward from previous years and doesn’t include any measures to offset the impact, such as increasing rents. You can work through how your tax liability might impact your personal situation and your options to offset it with your enable.me coach.

The bright-line changes:

Whether you’ll have to pay tax on your property’s capital gain depends on when you purchased, when you sell, and whether it was a new or existing property. As a guide:

It’s also worth noting that if you’re considering transferring a property into a new entity, this will likely trigger the re-start of the bright-line test. If that transaction happens after the 27th of March, make sure you’re comfortable with the applicable period being 10 years.

If you have any questions, please don’t hesitate to contact the enable.me team.

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