Tax Talk | Residential Rental Interest Deductions

Proposal

The proposal broadly considers:

1. Which properties are subject to the new interest limitation rule,
2. What the definition of a "new build" is, and
3. Flow on impacts, especially on the "rollover relief" rules, the residential rental loss rules, and for properties used both residentially and commercially.

Interest Deductions

Broadly, owners of any residential rental property purchased after 27 March 2021 will not be able to claim interest deductions from 1 October 2021. Residential rental properties purchased before 27 March 2021 will have the interest deduction reduced in stages over the next four years.

The interest deductions will be:

Interest deductions would continue to be available in full in the following situations:

• New builds
• Overseas located properties
• Commercial accommodation such as hotels and motels but not Airbnb
• Where the main home has rooms let out in a boarding / flatting situation (subject to usual apportionment)

The Government is considering keeping full interest deductions in the following situations:

• Student accommodation,
• Serviced apartments that more clearly resemble hotels as opposed to residential apartments,
• Māori collectively owned land and housing,
• Taxpayers subject to usual land taxation rules and
• Taxpayers subject to the bright-line test.

New Builds

New builds would be permitted interest deductions due to the Government’s policy of increasing housing supply. Along with the exemption from the interest limitation rules, new builds will also be subject to a five-year bright-line test, whereas non-new builds are subject to a ten-year bright-line test.

It is proposed that a new build would be a residential property that has received a code of compliance certificate up to twelve months prior to the date of acquisition.

The following examples of new builds have been proposed:

• A dwelling added to vacant land,
• Replacing an existing dwelling with one or more dwellings (including replacements of an old dwelling with a new one),
• Adding a standalone dwelling on residential land,
• Attaching a new dwelling to an existing dwelling,
• Splitting a dwelling into multiple dwellings (e.g. converting a six-bedroom home into three two-bedroom units),
• Commercial buildings converted into residential buildings.

The Government is considering whether a time limit should be implemented in relation to new builds to claim interest deductions. In addition, the Government is also considering whether the interest concession should apply only to the first owner of a new build or could include subsequent ones.

Rollover Relief

The discussion document also considers implementing rollover relief to enable the original bright-line purchase date to apply when there are transfers between the same ultimate economic owners. Rollover relief is proposed to extend to properties transferred to family trusts or from look-through companies and partnerships to their owners which would enable restructuring to take place without resetting the bright-line period. The lack of rollover relief has been and will be a significant issue, especially as the bright-line period is now ten years.

Comment

These proposals are consistent with the announcement made on 23 March 2021 and are not too much of a surprise. On a positive note, it is good to see potential rollover relief from the bright-line test to enable restructuring. However, we note some of the proposals may have a perverse outcome; for example, a one-for-one replacement is treated as a new build, but a substantial renovation is not treated as one even though the former is adding nothing to housing supply, and the latter may well be turning a previously abandoned house into a habitable one, therefore adding to the housing supply.

Complex interest apportionment calculations will also make compliance more difficult and costly.

If you wish to submit on the proposed changes, or have any other queries about the proposals, please contact your Baker Tilly Staples Rodway advisor.