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Is your rental property exempt?

Written By: Dion Friedman and Petrea Parkhill

A guide to property exemptions under new investor tax proposal

New tax policies proposed by the Government earlier this year could significantly increase the cost of owning debt-funded rental properties for landlords and property investors.

However, the Government recently announced a list of properties that will be exempt from these changes which gives investors more clarity about how they will be impacted.

This article summarises these exemptions to help investors and landlords determine what it will mean for them and their investments.

A recap
Currently owners of debt funded residential property can, subject to certain limitations, deduct the interest on borrowings against rental income from investment properties to reduce their income tax liability.

The Government intends to prevent interest deductions for properties acquired after 27 March 2021 and phase out the same deductions over four years for properties acquired before 27 March 2021. The legislation will apply from 1 October 2021.

However, these restrictions will not apply to “new builds”, “property development”, and other properties based on their physical structure or purpose.  

New build exemption
Interest will still be deductible on borrowings against rental income, if the property is considered a ‘new build’.

The Inland Revenue’s Information Sheet defines a new build as a dwelling that receives a Code of Compliance Certificate (CCC) confirming it was added to the land on or after 27 March 2021. 

The dwelling does not need to be made of new material or constructed onsite, meaning it can be a relocated home or made of second-hand materials.

The definition also incorporates an existing dwelling or commercial building which has been converted into multiple new dwellings.

The exemption begins from the date the new build receives its CCC and lasts for a fixed period of 20 years, regardless of whether there is a change of ownership during that time.

If the residence is removed from the property before the end of the 20-year period – for example if it is demolished or relocated – it will no longer be classed as a new build.

Development exemption
Similar to new builds, an exemption will apply to land held as part of a developing, subdividing, or land-dealing business or a property development.  

Other properties that are exempt
A range of other properties are also exempt as a result of their “physical structure or purpose” and include:   

  • A main home, even if the main home earns income from a flatmate or boarder
  • Bed and breakfasts where the owner lives on the property
  • Hotels which provide short-term accommodation

The full list of other properties is detailed in the IRD’s Information Sheet.  

Airbnb, and other similar short term accommodation providers, have been left off the exemption list.  This follows the Government’s statement that generally “private residential investment properties capable of being used for long-term accommodation” will be denied deductibility.

By not including Airbnb, or similar accommodation, in this exemption list it ensures landlords are not incentivised to convert long-term rentals to short-term rentals which could result in a reduction of available housing for those who need it.  

Conclusion
These proposals are expected to be passed into law in early 2022 so these terms remain subject to change.

It is worth noting these changes will not affect an investor’s ability to deduct other expenses from their gross rent such as insurance, rates and repairs and maintenance.

Before these proposals are finalised, property investors should assess the impact of these proposed changes on their investments and stay up to date with developments.

Haigh Lyon can provide advice on changes and exemptions associated with the new tax policy proposals as well as other property issues. Contact Petrea Parkhill on or 09 306 0621 and Dion Friedman on or 09 306 0628.