Changes to taxation rules on Residential properties

The Government announced today two significant policy changes to the rules governing residential property. It also announced further consultation on other matters relating mainly to new build houses.

The two areas changed by the Government announcement are

1. The length of the “Bright Line test” applying to profits on sales of residential properties

2. The ability to deduct interest on borrowings relating to residential properties

Length of the Bright Line Test‍

With the announcement today gains on sales of residential property subject to the bright line test, lengthen from an ownership period of five years to 10 years (This holding period was extended from its original two year holding period to five years on 28 March 2018.)

This results in residential property acquired on or after 27 March 2021 and sold within 10 years, being subject to tax on the net gain on sale.

For residential property acquired after 28 March 2018 and before 27 March 2021, it is only subject to a five year bright line test. There are some exceptions to these dates for property acquired after 27 March 2021, but committed to purchase in the days leading up to this date. They will only be subject to the five year period.

New build properties (the definition to be decided upon) will also only be subject to the five year bright line period.

The same exemptions from the bright line test will apply to the 10 year period. However, the main home exemption is being updated for properties that were not being used as your main home throughout the entire required holding period. The gain attributable to the period when the residential property was not your main home, becomes subject to tax on that gain. Relevant records will need to be maintained.

Changes will also be made for residential property being used for short term accommodation (i.e. AirBNB). Such properties will also become subject to these rules and not be treated as commercial property.

Property not subject to the bright line test are unaffected by these changes, including non-residential property, property owned by a dealer or developer or intangible property. Only residential property is subject to the bright line test.

Deductibility of Interest on borrowings for residential property

Although the Government will consult on the detail of the interest proposals, it intends to set 1 October 2021 as a milestone date for interest deductions.

At present, interest on borrowings for the residential property are able to be claimed as a deduction against rental income, even when this deduction results in a loss, subject to ring-fencing of residential rental losses.

For residential properties acquired after 27 March 2021, the ability to deduct such interest ends 1 October 2021.

For residential properties acquired before 27 March 2021, the ability to deduct such interest begins to be phased out from 1 October 2021. The ability to deduct interest ends in its entirety from1 April 2025.

Existing loans before 27 March 2021 are subject to this phase out. Additions or extensions to these loans after 27 March 2021 are subject to the 1 October 2021 restriction.

Loans for business secured against residential property or loans by developers and builders on residential property builds are not subject to these restrictions.

These rules and changes have only just been announced and may change. Please keep an eye on this space and your other sources of information to keep current and abreast of this. Of course, if you have questions, please feel free to contact us.

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