If you’re a homeowner or considering buying property in New Zealand, you’ve likely heard the term “interest deductibility.”
But what does it mean for you and your mortgage? In this guide, we’ll break down the basics, answer common questions, and share practical tips—all in everyday language.
Let’s dive in!
Common Questions About Interest Deductibility
What is Interest Deductibility?
Interest deductibility refers to the ability to deduct interest expenses on a mortgage from your taxable income.
This can lower your overall tax bill, making home ownership more affordable.
Why It Matters
For property investors, this deduction can be significant.
It reduces the net cost of borrowing, enhancing the profitability of their investment properties.
How Has Interest Deductibility Changed in New Zealand?
Recently, New Zealand introduced changes affecting the deductibility of interest on residential investment properties.
If you’re a property investor, these changes might impact your tax planning and financial strategy.
The Key Changes
Phasing Out: The deductibility of interest on loans for residential investment properties is being phased out over a four-year period, beginning in October 2021.
Exemptions for New Builds: New properties might be exempt from these changes, encouraging investment in newly constructed housing.
Who is Affected by These Changes?
These changes primarily impact landlords and property investors, not owner-occupiers. If you rent out your property, it’s crucial to understand how these rules apply to you.
Owner-Occupiers vs. Investors
Owner-Occupiers: Those living in their own homes are not affected by these changes. Their mortgage interest remains non-deductible as it always has been.
Investors: Those who rent out their properties will see a phased reduction in their ability to claim interest as a tax-deductible expense.
Breaking Down the Changes
Here’s a simplified breakdown of the key changes:
Gradual Phasing Out
The phasing out process began in October 2021 and will be complete by March 2025. The schedule is as follows:
- October 2021 – March 2022: 75% of the interest can be deducted.
- April 2022 – March 2023: 50% of the interest can be deducted.
- April 2023 – March 2024: 25% of the interest can be deducted.
- April 2024 – March 2025: No interest will be deductible.
New Properties Exemption
New builds are a significant part of the government’s strategy to increase housing supply. Properties that received their code compliance certificate after March 27, 2020, are considered new builds and may qualify for interest deductibility.
Benefits of Investing in New Builds
- Tax Benefits: Continued ability to deduct interest.
- Increased Supply: Contributing to the housing supply, potentially stabilizing housing prices.
Practical Tips for Property Investors
Stay Informed
Keep up with the latest regulations to ensure you’re making informed decisions. Websites like the Inland Revenue Department (IRD) offer detailed updates and guidelines.
Consult a Tax Professional
Tax laws can be tricky. Consulting with a tax advisor can help you navigate these changes and optimize your tax strategy.
Consider Your Investment Strategy
With these changes, reassessing your investment strategy might be necessary. Consider diversifying your investments or focusing on new builds to take advantage of exemptions.
Strategies to Consider
- Reinvesting in New Builds: Selling older properties to reinvest in new builds.
- Diversification: Looking at other investment opportunities to balance your portfolio.
Real-Life Example: Sarah’s Story
Sarah owns two rental properties in Auckland. She was initially concerned about the impact of the new rules on her finances. After consulting with her accountant, Sarah decided to sell one older property and reinvest in a new build. This move helped her benefit from the interest deductibility exemption, aligning her portfolio with the new regulations.
Lessons from Sarah’s Experience
Proactive Management: Sarah’s proactive approach helped her mitigate the impact of the new regulations.
Professional Advice: Consulting with a professional provided Sarah with a clear strategy.
Financial Planning and Interest Deductibility
Adjusting Your Financial Plan
With the changes in interest deductibility in new zealand housing market, it’s crucial to revisit and adjust your financial plan. Here are some steps to consider:
Review Your Current Portfolio
- Assess Impact: Calculate how the phasing out of interest deductibility will affect your cash flow and profitability.
- Property Performance: Evaluate the performance of each property to decide which to keep or sell.
Plan for Tax Implications
- Projected Taxes: Estimate your future tax liabilities considering the reduced deductibility.
- Tax-Efficient Investments: Explore other tax-efficient investment opportunities.
Mortgage Refinancing Options
Refinancing your mortgage might be a strategy to explore. Here’s how:
Lower Interest Rates
- Shop Around: Compare different lenders to find the best interest rates.
- Negotiation: Negotiate with your current lender for better terms.
Fixed vs. Variable Rates
- Fixed Rates: Locking in a fixed rate can provide stability in your financial planning.
- Variable Rates: These can offer lower initial rates but come with the risk of increasing costs over time.
Conclusion
Understanding interest deductibility in the New Zealand housing market is crucial for property investors.
By staying informed and proactive, you can navigate these changes effectively. Remember, you’re not alone—reach out to professionals and engage with your community for support and advice.
Navigating the changes in interest deductibility might seem daunting, but with the right information and support, you can make decisions that benefit your financial future. Keep learning, stay engaged, and adapt your strategies as needed.
Good luck on your investment journey!
Frequently Asked Questions
What is interest deductibility for residential investment properties?
Interest deductibility allows property investors to deduct the interest paid on mortgages for their rental properties from their taxable income. This reduces the amount of tax they owe.
Why was interest deductibility removed in 2021?
The previous Labour government removed interest deductibility in 2021 to try to improve housing affordability by reducing demand from investors. This was in response to a surge in house prices during the COVID-19 pandemic.
How much will landlords save under the new rules?
The new National-led government will phase in 80% deductibility from April 2024 and 100% from April 2025. This will save landlords significant amounts in tax. For example, an investor with an $800k mortgage could save around $15,000 in the first year and $176,000 over 15 years.
Will this impact rents?
The government argues restoring interest deductibility will ease pressure on rents. However, the impact is uncertain. While it may encourage more investment in rentals, other factors like migration also affect rents. Rents have risen in recent years despite the deductibility changes.
Is this a fair policy?
Opinions differ. Landlords argue it’s unfair they can’t deduct a major business expense like other industries. But the previous rules were intended to level the playing field for first home buyers. The new policy is retrospective and will cost the government revenue.
In summary, the restoration of interest deductibility will significantly benefit landlords financially but its broader impacts on the housing market are debated. The policy aims to simplify the tax system and encourage investment in rentals, but at a fiscal cost to the government.
