New Rental Property Rules:
To recap – Deductions for expenses incurred on residential rental properties are limited to the extent of the income from that property.  Excess deductions will be able to be offset against other sources of income, and these “quarantined expenses” are carried forward and are able to be claimed against future profits from the property.
 

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Brightline Rules:
The Brightline property rule means if you sell a residential property within certain timeframes you might have to pay income tax on any gains.  (Brightline rules do not apply to properties purchased before 1 October 2015.  Properties purchased between that date and 28 March 2018 will now fall outside the rules, as they were subject to a 2 year Brightline period, which has now ended.)

Residential rental properties purchased and sold on or after 27 March 2021 – and sold within 10 years are subject to Brightline.
Residential rental properties purchased between 29 March 2018 and 26 March 2021 – and sold within 5 years, are subject to Brightline.

It also applies to NZ tax residents who purchase an overseas residential rental property.

Exclusions to the Brightline rule:
Brightline does not apply to the sale of property that has been your own home, inherited property or if you are the executor / administrator of a deceased estate.

Two changes to Brightline test, applies on properties purchased after 27 March 2021:
1. Main home exclusion – where you do not use your main home for 12 months or more, then the gain on sale would be apportioned between the time used as the main home against the time not used as the main home.  This might apply where you move out of town for more than 12 months, or move out during renovations etc.
2. Some transfers to family trusts and transfers to/from look-through companies and partnership – would not be counted for purposes of Brightline.

The main home exemption cannot be used if it has already been used twice in the immediate past two year period.

Investors should be cautious with ownership changes of residential rental properties, as they could initiate the start of a new 10 year period.  Eg. as we write this, the government is looking at the issue of parents helping children get into the property market, and over time the ownership changes, due to children paying parents back.

We urge you to contact us before purchasing a residential property, even if it is for your main home.  We will send you more detailed information to assist you in management of any tax implications that may arise.
 

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Abatement of Interest Deductibility:
From 1 October, it will not be possible to claim an interest deduction in relation to borrowing for the purchase of residential rental properties, except in relation to new builds.

For residential rental properties owned prior to 27 March 2021, the interest non-deductibility will be phased out over the next 4 years.

Loans drawn down on or after 27 March 2021 will be subject to full limitation from 1 October 2021, unless the property was acquired as a result of an offer made on or before 23 March 2021, that could not be withdrawn before 27 March 2021.

Property developers (who pay tax on the sale of property) will not be affected by this change.  They will still be able to claim interest as an expense.  New builds will also be able to claim interest deductions.

Essentially, “New Builds” are defined as a self-contained residence (and includes “off the plan builds”) that received Code of Compliance Certificate confirming the residence was added to the land on or after 27 March 2021.  New Builds will also include modular and relocated homes, some conversions of existing dwellings into multiple dwellings and conversion of commercial buildings into residential properties.

These new builds are able to claim interest deductions relating to land they develop, subdivide or build on, to create a new build.  The new build exemption will expire 20 years after a new build received its Code of Compliance Certificate, or when the new build ceases to be on the land, whichever is earlier.

Borrowings used for other purposes (e.g. purchasing a business vehicle) will continue to be deductible.

Interest deductions will continue to be available in full for the following types of property:
– A portion of the main home if it is used to earn income (for example, from flatmates or boarders). 
– Properties used as business premises (except for accommodation business), like offices and shops.  This includes residential properties to the extent they are used as business premises (for example, a house converted into a doctor’s surgery). 
– Hospitals, hospices, nursing homes and convalescent homes. 
– Retirement villages and rest homes. 
– Hotels, motels, hostels, inns, campgrounds. 
– Houses on farmland. 
– Bed and breakfast where the owner lives on the property. 
– Employee accommodation. 
– Student accommodation. 
– Land outside New Zealand. 
– Maori collectively owned land and housing. 
– Emergency, transitional, social, and council housing.  
 

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Record keeping for Residential Property:
We suggest clients keep a record of the Purchase and Sale dates and agreements and valuations, of any residential rental properties that they own.  A reminder that copies of invoices paid, and all financial records are required to be kept for 7 years for IRD purposes.

We also suggest that due to the changes around the main home exclusions, clients should keep a note of when they purchase a new main home, how much it cost, and a valuation.  Also, to record if you are away from your main home for any period of time over one year.