The recent election campaign by the National party in New Zealand had a significant focus on addressing the concerns of property owners and landlords. Promising changes in policies related to Brightline periods and interest deductibility. We take a closer look at these proposed changes and what they mean for property owners and investors.
Reduced Brightline Period: A Boon for Property Owners
One of the headline proposals by the National party is to reduce the Brightline period significantly. Currently set at 10 years for non-family homes, this tax period is expected to be cut to just 2 years from July 2024. This change means that landlords currently stuck within the 10-year Brightline period could sell their properties without incurring capital gains tax. Let's consider an example:
- In February 2022, Chris and Nicola purchased a non-new build property.
- In 2025, they decide to sell and made a $100,000 gain.
- Under the current Brightline laws, they would pay tax on this capital gain, potentially up to $39,000 at their personal tax rates.
- However, under National's proposed changes, they would pay no tax as they have held the property for more than 2 years.
Interest Deductibility Returns
National has also proposed a gradual reinstatement of 100% interest deductibility on non-new build properties. This means property owners will no longer be taxed on a rental property that runs at a loss due to disallowed interest. The process will happen incrementally over the next three years, with residential property owners being able to claim 100% of their interest by March2027. To illustrate, let's consider a scenario:
- You own a residential property in a Trust that currently incurs an annual loss of $10,000, including $35,000 in disallowed interest.
- Currently, you would pay tax on $25,000 after accounting for the disallowed interest
- Under National's proposed changes, you would pay no tax on the property, and the $10,000 loss can be carried forward to offset against any future profit from residential properties the Trust owns.
Commercial Property Owners: Watch Out for Depreciation Changes
While the proposed changes bode well for residential property owners, it's not all positive news for commercial property owners. National plans to eliminate depreciation on buildings in March 2025, which could result in a higher tax bill for commercial property owners.
Foreign Buyers and Tax Thresholds
National also aims to reintroduce foreign buyers into the New Zealand property market, but with a twist. They propose a 15% tax on homes sold for more than $2 million to foreign buyers. This tax revenue is intended to fund a shift in personal tax brackets by 11.5%. The effects on the housing market remain uncertain, with plenty of skeptical tax specialists claiming that the policy will not have the intended revenue gathering effect.
Trust Tax Rates and Investment Alternatives
With the recent announcement of increased Trust tax rates from 33% to 39% by Labour & likely to be maintained by National, it is important to explore alternative investment options. One such option is a Portfolio Investment Entity (PIE), which invests in different passive investments. The PIE tax rate remains unchanged and could offer substantial tax savings compared to individual and Trust tax rates.
Currently, PIE tax rates are as follows:
- 10.5% for total income under $14,000
- 17.5% for total income under $48,000
- 28% for total income over $48,000
For individuals with incomes over $48,000, choosing a PIE investment can lead to significant tax savings, as the difference between 28% and the top personal tax rates (30%-39%) can be substantial.
We note that just like the difference between the top individual tax rate and the Trust tax rate, the gap between the top PIE rate and the top income tax rate will most likely be closed in the future.
National's proposed changes have the potential to benefit property owners and investors, particularly in the residential sector. However, commercial property owners should be prepared for upcoming depreciation changes. As the new government decides on these tax policies, staying informed and exploring alternative investment options like PIEs can be a smart move for investors. If you have questions about how these proposed changes might affect you, don't hesitate to seek professional advice.
Schedule a consultation with Ingham Mora, your trusted Tauranga accountant, today. Our team of experienced professionals can guide you through the uncertainties of the new tax landscape and help you make the best decisions for your financial success.