Back in March, it took everyone by surprise when the Government changed its rules on interest tax deductibility for property investors, and extended the bright line test. We had a lot of questions that didn’t seem to have answers.
Now we have some guidance, because Inland Revenue has released a Q&A document covering a long list of questions about the new Government proposals for interest limitation and adding to the bright-line rules.
Here we’ve summarised some aspects of the approach that Inland Revenue has taken, and you should talk to us for more clarity around the rules for your particular situation.
What is exempt from the new limitations?
Taxation remains unchanged for:
- Retirement villages
- Developments, including build-to-rent and some remediation work
- New builds (certified after 27 March 2021)
The new rules do not affect your main home.
How does the new build exemption work?
The new build exemption still hasn’t been finalised, but there are a few options being considered, including a perpetual exemption and a time limit of 10 or 20 years.
Tenants, boarders, Airbnb
Here it seems that if the person is staying within your house, there are no limits on interest deductibility. Once they’re housed in a separate dwelling, even if it’s on the same property (a granny flat for example), interest deductibility limitations will apply.
Transferring home ownership and the bright-line test
Currently, moving your home into a family trust can trigger the bright-line test. However, there is a proposal for the transfer to be effectively ignored under certain conditions. There is also a proposal to ignore a land transfer to a look-through company or partnership. Our advice? Don’t make any sudden moves on this one without talking to us first.
Helping kids into first homes
The IR provides this example: you took out a loan to help your child buy their first home, and your child pays you interest. You pay tax on the income and claim deductions on the interest. In this instance, the interest limitation rules would not apply to you.
However, if you own a second property and rent it to your child, or another family member, interest limitation rules would apply.
The new taxation regimen starts to kick in from 1 October 2021. If you own properties that might be affected, please get in touch – we can show you ways to make these rules easier to understand and comply with.
We can also run the numbers to show you how much difference these regulations will make to your overall financial position over the next few years. Should you sell up now or keep holding? We can give you the information you need to make smart decisions.
Together we can achieve more.