The Minister of Finance, Hon Grant Robertson, has announced proposed changes for residential property acquired on or after 27 March 2021.
The proposed changes include:
- extending the bright-line test to 10 years
- amending the main home exclusion which would require tax to be paid on gains made for periods the property is not used as the owner’s main home
- allowing newly built homes to use a 5 year bright-line test
- not allowing property owners to claim interest on loans used for residential properties as an expense against their income from those properties. This would start from 1 October 2021, and would also be phased in over 4 years for existing properties. There would be an exemption for newly built homes.
Bright-line test proposed changes
The bright-line test is the rule that determines whether a person who sells a residential property has to pay tax on the capital gain they make. If you meet the criteria of the rule, you will pay tax on any profit you made on the sale.
The current bright-line period is 5 years. The government has announced that their intention is to extend this to 10 years for residential property except new builds. Inherited properties and those which have been the owner’s main home for the entire time they owned it will continue to be exempt from all bright-line tests.
The below flow chart, published by Inland Revenue helps to determine what length of bright-line test a property is subject to:
More information can be found on this fact sheet.
Interest deductions on residential property income proposed
The Government has agreed to change the rules that allow property owners to claim interest on loans used for residential properties as an expense against their income from those properties.The Government will consult on the detail of these proposals and legislation will be introduced shortly thereafter.Consultation will cover the details of an exemption for new builds acquired as a residential investment property, and whether all people who are taxed on the sale of a property should be able to deduct their interest expense at the time of the sale.
The legislation will apply from 1 October 2021.
More information can be found on Inland Revenue’s fact sheet.
Inland Revenue’s website will be updated will all details once legislation has passed.