At long last, and after various “amendments” to the pre-election promise to restore interest deductibility for residential lending, the bill that will change the law to deliver on the promises has been released.

This contains mostly good news for property investors. Sense and fairness are being restored in some measure. Perhaps now we will hear less from uninformed journalists reporting “tax breaks” for landlords are to be reinstated. The ability to take a tax deduction for interest on money borrowed to buy an income-earning asset, that every other industry enjoys, could hardly be described as a tax break.

So, what are the key changes?

1. Interest deductibility to be phased back in for residential lending
2. Bright-line to be returned to two years from July 1, 2024
3. Depreciation on commercial buildings to be removed from April 1, 2024.

What’s not being done? The much-hated loss ring fencing rules that are a targeted measure at residential landlords remains, meaning that if your restored interest deductions tip you from profit to loss, these losses can only be offset against residential rental income, not your other personal income.

Detail in the bill has provided answers to some of the nagging questions that remained when we were solely reliant on political promises to map our property strategies.

Here are the key takeaways.

Deductibility

Residential interest deductibility will be as follows. In the 2024 year, 50 per cent (not the 60 per cent promised in the coalition agreement); in the 2025 year 80 per cent; in the 2026 year 100 per cent. Importantly, the deductions will be available for all residential property, regardless of whether it was acquired before or after March 27, 2021. So, if you purchased a non-new build property after this date, you will gain 80 per cent deductibility for the 2025 year. Accountants have been waiting for clarity on that point and, thankfully, it’s here.

If you find yourself with a tax liability for a sale within a bright-line period, you will also be allowed to claim the interest you have been denied a deduction for against the bright-line gain.

The Bright-Line

The changes restore bright-line to two years for bright-line end date sales that occur after July 1, 2024, ie for agreements entered into post July 1, 2024.

The complex time and land area apportionment rules associated with the main home exemption will be simplified. The main home exemption will again apply, as it did originally, when the land has been used predominantly (more than 50 per cent) for most of the time the person has owned the land.

In a surprise and welcome move, the current rollover relief provisions will be extended to include all transfers of land between associated persons provided the transferee was associated to the transferor for at least two years prior to the transfer.

This change recognises that transfers between associates, which include things like normal estate planning measures, are not the speculative land transactions the bright-line rules were originally designed to capture. Hallelujah, some sensible flexibility that will reduce the incidence of unintended consequences from the bright-line rules.

Depreciation

One of the measures designed to fund tax cuts to middle-income earners was the removal of the 2 per cent depreciation deduction on commercial buildings. This is included in the bill and will apply to the 2025 income year.

The ability to depreciate separately identified fit-out and chattel items remains, as these items are not buildings.

On that point, remember the purchase price apportionment rules apply to commercial acquisitions.

These rules bind vendor and purchaser to the same split between land, buildings and fit out, so the fit-out value of an acquisition needs to be determined and negotiated with the vendor.

You can no longer simply commission a fit-out valuation after settlement.

So, there you have it, these are the tax measures designed to restore a functioning private landlord sector in New Zealand.

Back in business.

Mark and his team specialise in advising on property-related transactions, valuation and restructure services, and tax planning.
PKF Withers Tsang & Co Phone 09 376 8860, www.pfkwt.co.nz