Residential Property Tax Changes October 2021

Residential Property Tax Changes October 2021

Recent government housing policy announcements include some major tax changes that removes interest deductibility for residential investment property.

These changes miss the point that residential rentals are a business and go against the underlying principal of interest deductibility on business borrowing.

Interest Deductibility on Residential Rental Properties

Interest is a typical cost of doing business, and as such should be tax deductible.

Getting rid of interest deductibility is a drastic change that will significantly raise the cost of providing rental properties.

Currently, when owners of residential investment property calculate their taxable income, they can deduct the interest on loans from their taxable income to reduce the tax payable, the same as all investments.

When will the residential rental property tax changes take effect?

The Labour Government plans to pass legislation later this year that will remove the interest deductions for residential investment property acquired on or after 27 March 2021 and on new borrowings on or after that date to maintain or improve a property acquired before 27 March 2021.

This will be in effect from 1 October 2021.

Interest on loans dealing with residential property secured before 27 March 2021 can still be claimed as an expense against the property income. However, this will be phased out within the next four years.

The implications for property investors who manage their investments as a business

Every investor who manages their investments as a business knows that the interest cost is the largest single expense and with the removal of interest deductibility, the taxable income portion would be extremely high.

The elimination of interest deductions on residential property will have a harsh and serious effect on investors’ cash flow.

Investors will now need to have extra cash to cover the tax obligation. This cash will need to be obtained from somewhere, and it is our expectation that it will be derived, in part, from tenants through rent increases.

The changes will potentially impact those who are already most vulnerable

These deductions totally change the financial dynamics of investing in residential property, and will potentially impact those who are already most vulnerable in our community, which has led some tenancy advocacy groups to speak out against the proposed legislation.

The only part of the new changes where the Government is still evaluating its options is whether interest deductibility restrictions should likewise apply to new residential rental builds. The interest deductibility rules are unaffected for developers and builders.

Contact Drumm Nevatt & Associates for all your business development, bookkeeping and accounting needs.