The government’s move to a 10-year bright-line and removal of interest deductibility on existing stock residential property has forced savvy investors to pivot and mine opportunities wherever they can find them. Here are 15 of the most valuable things to understand to tip the balance back into your favour.

1. When buying a “new build” property, interest is deductible for 20 years provided the CCC was issued after March 27, 2020, but to gain a five-year brightline rather than a 10-year bright-line the acquisition date must be within 12 months of the CCC being issued. If selling a property that has deductibility time remaining on its 20-year clock, promote this when marketing.

2. The term “new build” does not just mean brand new buildings erected on vacant sections. There are projects from existing buildings that can still offer new build outcomes with interest deductibility and five-year bright-line. These include converting commercial to residential, relocating second-hand buildings, converting motels to residential, splitting a single dwelling into two or more legal flats, and recladding a leaky building where 75 per cent or more of the cladding is replaced to make it habitable again.

3. Consider pivoting an investment plan to a development for rent or resale plan. All interest is deductible when property is developed for retention for rental or for resale as gains on sale of developed for resale properties are taxable.

4. Interest deductibility is determined by the use borrowed money is put to, not the security for the borrowings. This means interest is still deductible if disallowed residential property is mortgaged to provide the security to finance a commercial property investment. And remember, this can be as simple and inexpensive as a car park space.

5. Commercial dwellings like boarding houses, lodges and student accommodation sit outside the definition of disallowed residential land.

6. When helping children into property, consider putting them or their on the title of the property they will live in by lending them the money to ensure they get the main home exemption from bright-line.

7. When a new title emerges from a subdivision this does not reset brightline. Bright-line is still determined by the acquisition date of the property and the day count runs from when the land was first registered to the buyer.

8. Restructures motivated by asset protection or estate planning initiatives can offer spin-off interest deductibility improvements. For example, a commercial building in a mixed residential/commercial portfolio could be sold at market value from a look-through company to a trust. The trust could borrow the money to buy it from the company and claim all its interest. The look-through company could then pay down debt on disallowed residential property within the company structure that is losing its deductibility.

9. Examine the cost of retaining disallowed residential property. Selling a low yielding residential investment to pay down debt that costs more than the property is yielding will reduce the tax payable by reducing nondeductible interest costs and improve overall cash flow across the portfolio.

10. Investors with businesses in companies may be able to restructure debt into their companies by borrowing money to declare dividends from historical retained
profits, and/or refinancing shareholder loan accounts. This in turn will enable them to reduce debt on their residential investment portfolios. Even if the interest rates are higher this is unlikely to be as significant as the advantage of gaining deductibility where it is otherwise lost.

11. Recent changes have extended rollover relief provisions to include movements of residential property to and from look through companies and trusts in certain
circumstances. This provides wider opportunity to alter property ownership without the change triggering a brightline taxing event or reset. Understand that other disposal consequences like depreciation recovery still apply.

12. Despite the main home exemption from bright-line, a home that is sold within the bright-line period that has not been the main home for 12 months or longer
during its tenure of ownership can still attract some bright-line tax. Understand this before you decide to move out for a 12-month period or longer.

13. If you have a mixed portfolio of residential and commercial and can’t trace your lending to a particular property you can use a concessionary option to determine deductibility. The win here is the formula applies deductibility first to the market value of the commercial properties as at March 26, 2021 and market value is likely to be significantly higher than the cost price.

14. Interest deductibility limitation rules do not apply to overseas residential property, but the bright-line rules do.

15. While National has pledged to repeal the changes, punting on election outcomes is not a sound basis for tax planning. Plan and deal with the rules now.

Mark and his team specialise in advising on property-related transactions, valuation and restructure services, and tax planning.

Withers Tsang & Co Phone 09 376 8860, www.wt.co.nz