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Does the drop in interest rate deductibility affect you?

Are you investing in residential property for your retirement?

Were you hoping to be able to live off the rental income from your residential property?

The rules have changed.

From 1 October 2021 there are going to be restrictions on residential property investors’ ability to claim interest as a deductible expense.

For properties that are not new builds and acquired on or after 27 March 2021, you will not be able to claim any interest deductions at all.

For second-hand properties acquired prior to 27 March 2021 your ability to claim interest will be phased out over the next four income years, so that from 1 April 2025 there will be no ability to claim any interest as a deductible expense against residential rental income.

The phase-in period over four years sees interest become progressively less deductible over each financial year as below.

  • 1 April 2021 to 30 September 2021 100%

  • 1 October 2021 to 31 March 2022 75%

  • 1 April 2022–31 March 2023 75%

  • 1 April 2023–31 March 2024 50%

  • 1 April 2024–31 March 2025 25%

From 1 April 2025 onwards there will be no deduction for interest paid 0%

New build exemption on interest

Interest incurred on a 'new build' that is bought for investment purposes is exempt from this, i.e. interest deductions can still be claimed where you buy a new build as a rental.

In a consultation document just released, spearheaded by Revenue Minister David Parker, the Government proposed a property should be considered a “new build” when:

  1. a dwelling is added to vacant land

  2. an additional dwelling is added to a property, whether stand-alone or attached

  3. a dwelling (or multiple dwellings) replaces an existing dwelling

  4. renovating an existing dwelling to create two or more dwellings

  5. a dwelling is converted from commercial premises such as an office block converted into apartments.

The Government said a “dwelling” should have its own kitchen and bathroom.

As for the question of how new a property needs to be to be considered a “new build” under the interest deductibility rule change, the Government proposed it should have been acquired within a year of its Code Compliance Certificate being issued.

Property dealers and developers pay income tax on profit realized when the property is sold.

For instance, if you previously received $41,600 in rent and paid $11,000 in rates, insurance and repairs, and $30,600 in interest, you had net cashflow of zero.

Now you will have to pay tax on $30,600, due to interest not being deductible.

So net cashflow will become negative $10,098 due to the new tax rules, when previously it would be zero. (At 33% tax).

What Do We Recommend?

  • We recommend taking the time to review your options?

  • Can you borrow for other purposes and retire the residential property debt?

  • Can you pay off some or all of the debt prior to 31 March 2025?

  • When you calculate the expected gain on your residential property - is it still a good investment?

Do you need assistance, then click below to make an appointment?


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