The government has recently published draft legislation, which provides more detail on how the scheme will work. Here’s an overview of what you need to know.
What do the tax changes mean?
The draft legislation removes property investors’ ability to deduct mortgage interest from taxes on rental properties. However, new build properties are exempt from the changes.
When do the changes come into effect?
Investors can no longer claim deductions on existing properties bought after 27 March. Deductions for existing properties bought before that date are being phased out between 1 October 2021 and 31 March 2025.
The phasing out of interest deductions works as follows:
What is a new build?
There’s now more clarity about what is a new build. Investors can deduct interest on properties that received a code compliance certificate (CCC) on or after 27 March 2020. And it also covers existing properties that are converted into several new dwellings, plus commercial buildings converted into residential use.
How long is the new build exemption?
The exemption remains for up to 20 years after the property receives a CCC. Furthermore, the exemption applies to both the initial and subsequent purchasers within the 20-year period.
What about build-to-rent developments?
Build-to-rent developments are included in the 20-year exemption. What’s more, the government has hinted it’s considering extending the exemption for these developments beyond 20 years.
Can I continue claiming interest deductions on my bach?
The rules apply to interest on residential properties rented out some of the time and used privately. This is often the case with holiday homes. Unless you qualify for the phased approach because the loan predates 27 March, interest expenses for your bach will be non-deductible from 1 October.
Where can I get more information?
There’s a lot to get your head around. IRD has developed a series of information sheets to explain the changes in detail. Check them out here, or contact your Loan Market adviser.
