The government’s tax changes that move the bright-line from five to 10 years and remove the deductibility of interest associated with borrowing to buy residential property both contain exemptions for “new-build” residences.

If the acquisition is a new build interest deductions are allowed for a 20-year period from the issuance of the building’s code of compliance certificate (CCC) provided it is issued after March 27, 2020.

For bright-line purposes, new builds confer a five-year bright-line if they are acquired within 12 months of the building’s CCC being issued. So, defining exactly what a new build is has significant tax consequences. Readers might be surprised by some of the examples that can fall within the definition.

Focus On Exceptions

New-build land is generally defined to include land to which a self-contained residence or abode has been added, provided a code compliance certificate is issued on or after March 27, 2020 showing that the residence or abode has been added to the land. There are, some exceptions, including the below.

1. A CCC being issued on or after March 27, 2020 evidencing a place already on the land has been converted into a self-contained residence. Examples of this might include a commercial building being converted into one or more self-contained residences or an existing home converted into two or more self-contained residences.
2. Building consent records show that the conversion of a place from a hotel or motel into one or more self-contained residences was completed after March 27, 2020. For example, a motel building is legally converted into self-contained apartments.
3. A place that is removed from the earthquake-prone buildings register on or after March 27, 2020 and either received its CCC on or after March 27, 2020 evidencing the building work to remediate the place is complete, or building consent authority records show the remediation work was completed after March 27, 2020 and was verified by a qualified engineer. An example would be an existing apartment block in Christchurch that was on the ERP register following the earthquake that was remediated and removed from the register.
4. The place was not previously weathertight, but a CCC has been issued on or after March 27, 2020 evidencing that at least 75 per cent of cladding has been replaced. For example, a leaky home is acquired and has been reclad to deal with the weathertightness issues to make the building weatherproof and fit for purpose again.

One important point to note is that for the purposes of bright-line, to be a new build that will earn the buyer a five-year bright-line rather than a 10-year brightline the acquisition needs to have been made within 12 months of the CCC being issued, thereby limiting the time for which a property can be considered a new build. But, because the right to deduct interest on a new build extends from owner to owner for a 20-year period from the issuance of the CCC, no such 12-month limitation exists.

Minor Dwellings

This means it might be possible to acquire a property that has a CCC issued after March 27, 2020 and gain an interest deduction on money borrowed to buy it, but because the acquisition is later than 12 months from the CCC being issued the property is still on a 10-year bright-line.

Another issue is that the definition of a new build in section DH 5(7) uses the words “to the extent”. The inclusion of these words means that sometimes only part of a piece of land may be new-build land. The construction of a new minor dwelling on land may confer new-build status to the land the minor is erected on, but not the land that contained the existing dwelling.

The definition also refers to the abode being “self-contained”. This means the place can be lived in by a single household without having to share essential facilities with another household. The term “new build” should also not be assumed to mean the residence must be constructed from new materials. The essence is that it must create a new legal residence, but it does not matter that the residence may be constructed from non-new materials or be a relocated building.

A new build can include a tiny house provided it is self-contained with its own kitchen and bathroom and is subject to the issuance of a CCC once positioned on the land. The scope of the definition of a new build is considerably wider than building a single new home on a section.

Those seeking to navigate the changes and look for opportunities to take on projects that confer an interest deduction may be able to cast their net wider once they have a grasp on the types of projects that can fit the new-build definition.