Tax consideration for residential property investors and property managers

For many of us, the 2020 – 2021 summer holidays were a time of quiet reflection to revitalise and recharge after what can only be described as an unusual 2020. We have battled with a global pandemic, taken part in a record setting election result all while a hot property market continues. While COVID-19 has seen some tax changes and increased flexibility when dealing with the Inland Revenue, there has been very little change that has any real effect on residential property investors or property managers (in the tax world).

While a hot property market alongside a low interest rate environment presents many opportunities, it is still important to seek advice from your tax advisor before acting on any plans. Here we mention three key considerations that we see for residential property investors and property managers in this current environment.

Residential bright-line rules

All property investors should be familiar with the residential bright-line rules. These were introduced to supplement the existing taxing provisions by deeming properties that were not a person’s main home, that were sold within a certain time period after buying it, to be speculative purchases and therefore any gain was to be treated as taxable income. While these rules were further reaching than we believe Parliament intended, they are here to stay and the Reserve Bank has even floated the idea of extending the rules to purchases and disposals within a ten year period to try and cool the housing market. The current rules for properties purchased after 29 March 2018 apply where a property, not your main home, is purchased and sold within a five-year period (the “bright-line period”). We have also recently seen long awaited review activity from the Inland Revenue identifying properties and taxpayers where they believe transactions should have been subject to the bright-line rules. Inland Revenue has extensive access to land information through the land transfer tax statements that are completed with every sale and purchase and the various land records held by Land Information New Zealand (LINZ). We expect this review activity to continue as Inland Revenue obtains further data.

This review activity from Inland Revenue should serve as a friendly reminder that before you take advantage of the current market and decide to sell a property, restructure or even simply change ownership between partners – do discuss the matter with your tax advisor first. Sometimes waiting just a few mere days can be the difference between your capital gains being taxed or not.

Interest deductibility

A key consideration for a property investor who has debt, is how to structure that debt in the most efficient manner. In the current low interest rate environment, we are fielding a number of calls about structuring debt for home improvements against rental property investments. At its most simplest, interest costs incurred from borrowing money are only deductible to the extent that those funds were used for the purposes of the rental property. This is the case irrespective of what the debt may be secured against. Where rental properties are owned in an individual’s name, there are very few options for restructuring debt for interest costs to be a deductible expense. There are greater opportunities for other ownership structures, dependent on your specific circumstances.

If you are looking at making changes to your debt profile or purchasing a new rental property, discuss your options with your tax advisor to ensure that your interest costs are going to be allowed as a deductible expense.

Ring-fencing of residential rental losses

Many of us will remember the golden days where you had negatively geared rental properties to create losses and receive large tax refunds from your PAYE paid from your wages. This was viewed as disadvantaging owner-occupiers and first time home buyers and the Government moved to change this to remove the perceived bias between investors and owner-occupiers. From 1 April 2019 for the 2019/20 and later income years, any “loss” incurred from rental properties is ring-fenced, to be carried forward and offset against future income derived from the rental property or residential bright-line income.

The information contained is of a general nature only and does not take into account your specific situation and circumstances. You should seek professional advice before acting on any material. While all reasonable care is taken in the preparation of the material in this communication, to the extent allowed by legislation Moore Markhams Hawke’s Bay Limited accepts no liability whatsoever for any reliance on it. All opinions, conclusions, or recommendations are reasonably held at the time of print but are subject to change without notice.

Ashleigh Gilmour, Associate Director, Moore Markhams Hawke’s Bay

The information contained is of a general nature only and does not take into account your specific situation and circumstances. You should seek professional advice before acting on any material. While all reasonable care is taken in the preparation of the material in this communication, to the extent allowed by legislation Moore Markhams Hawke’s Bay Limited accepts no liability whatsoever for any reliance on it. All opinions, conclusions, or recommendations are reasonably held at the time of print but are subject to change without notice.