Interest Deductibility on residential property

Government releases proposed rules for limiting interest deductibility for residential property investments

Although limitations on deductions of interest on residential properties has been announced and in place since the end of March this year, we were waiting on guidance and clarification on how these rules would apply to “new builds”. The Government had advised that this was yet to be defined.

The proposed rules for “new build” properties have now been released and are summarised below. These rules will be considered by Parliament and may change. The Finance and Expenditure Committee will consider the proposals and will call for submissions on the proposals. It would be expected that several submissions will be made, as it is an area of wide interest and public concern.

Essentially the proposals call for the following:

• The recently issued proposals do not change the earlier announced interest deduction limitations for residential property that is not a new build. And the interest deduction limitations never did apply to commercial property (including commercial property on land with a residential property), main home and land outside New Zealand and to residential property developers.
• Interest deductions will remain permissible for the land that is developed, subdivided, or built on to create a new build. A new build, in the proposals, is defined as “a self-contained residence that receives a code of compliance confirming the residence was added to the land on or after 27 March 2020.”

o This also includes a self-contained residence acquired off the plans that will receive its code of compliance on or after 27 March 2020.

o A new build does not have to be made of new material or constructed on site, so it can include modular or relocated homes

o Converting an existing dwelling into multiple new dwellings or converting a commercial property to residential can also qualify for the new build exemption

o Remediation work done to an existing property that is not significant enough to create a new build will not qualify

• The new build exemption applies from when you acquire the property—either when it receives its code of compliance or when you acquire it off the plan.
• The new build exemption expires 20 years after a new build receives its code of compliance and applies to anyone who owns the new build within the 20 years—i.e., does not cease when the property is sold
• New builds also have relief from the bright line test extension to 10 years, as they retain the five year bright line test period.
• Under the proposals, amounts of interest not able to be deducted may be available when the residential property is sold, if the sale is taxable, to reduce the gain, though the deduction may be limited to the amount of the gain

All the proposals are subject to change. If you’re planning an investment, purchase or sale, it would be sensible to review the rules and consult with us on your application. As the proposals are finalised into law an update will be provided.