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Demand for new build properties is tipped to increase with the Government’s confirmation that they will be exempt from its new tax rules for property investors.
The Government announced in March that it would phase out property investors’ ability to offset interest costs against rental income, and extend the bright line test.
On Thursday, it released a consultation document with details of its proposals.
It confirmed that investors would still be able to claim home loan interest on new builds, and proposed a new build would be defined as a self-contained dwelling (with its own kitchen and bathroom) which had been added to residential land.
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Deloitte NZ tax partner Robyn Walker said the proposed definition of a new build was relatively wide and was not just a brand-new townhouse on vacant land.
New builds would also include a house added to a property, whether stand-alone or attached, a house replacing an existing house, one house renovated to create two houses, and commercial properties converted into apartments.
Additionally, if a house was added to vacant land it would not have to be new or constructed on-site to qualify as a new build. That meant modular or relocated houses would qualify.
Significantly renovating a previously uninhabitable house so it was habitable could also qualify as it increased housing supply. However, the Government wanted feedback on how that could work.
Walker said the broad definition was good as it encouraged subdivision and building on existing land, but it meant the interest deductibility apportionment process could be complex.
“People building on existing property, which has an existing loan, will have to figure out what proportion of their interest deductibility will sit with the new loan and where the line between them is.
“It is important to be aware of that and to read what is proposed before rushing out to refinance loans to do a new build.”
The document also proposed that anyone who developed property to add a self-contained house or who acquired a new build within a period of time would be able to deduct interest for some or all of that property if it earned income.
Associate Finance Minister David Parker said this would channel property investment towards increasing housing stock and away from direct competition with first-home buyers and owner-occupiers for existing stock.
But Walker said there was still a question mark around whether subsequent owners would also be exempt from the interest deductibility changes and how long the new build exemption might last.
The document put forward three options around these issues, but they had to be addressed carefully, she said.
“If you turn off the ability to claim interest deductible after a short period of time it would feed off itself. It would entice investors into new builds but it would make the property less desirable to potential new owners.”
Monitoring how long it had been since a new build got its code of compliance in order to establish whether a property remained a new build would be difficult too, she said.
The document also detailed a range of other property types that would be excluded from the changes to interest deductibility.
Alongside the family home, they included land outside New Zealand, employee accommodation, farmland, care facilities, rest homes and retirement villages, and non-residential commercial property.
Social housing provided by Kāinga Ora and community housing providers which were charities would also be exempt.
Walker said the deductibility situation could become complex if someone owned a mixture of property types, including both commercial and residential property.
“How do they figure out what relates to residential property versus non-residential property? It will be necessary for taxpayers to trace their funding arrangements to each purpose and allocate interest appropriately.”
This could be challenging for many people as it was not a straight-forward process, she said. “It’s important for taxpayers to take the time now to understand how the proposals may impact on them.”
The Government said it would be consulting on the proposals and options in the paper until July 12. But while the new rules would be introduced into Parliament later this year, they would apply from October 1.