Heraclitus, a Greek philosopher, is quoted as saying “change is the only constant in life. This has never been more relevant in recent years and you may have noticed some recent changes that will impact rental property owners. Legislation has changed around the removal of tax deductions on loan interest for rental properties. Previously, interest payments could be claimed as a business expense and taxed accordingly, giving property investment a tax advantage.
Now, properties bought from April 2021 onward will not be able to claim any tax deductions for the interest paid on the mortgages. For all existing rental properties, including holiday home rentals, the tax deductibility is being phased out over four years.
Changes that have taken effect
October last year saw the reduction of rental property tax deductibility from 100% to 75%, you can still claim three-quarters of your interest payments as a business expense and get a tax advantage. The 75% rate remains in place until 31 March 2023.
For the following financial year (1 April 2023 to 31 March 2024), you’ll be able to claim 50% of your interest payments as a business expense against your rental income. Then it drops to 25% for the next financial year. From 1 April 2025 onward, no interest deductibility will be available.
There are some exemptions such as:
- Your main home;
- New builds;
- Commercial property;
- Farmland;
- Certain Māori land, dwellings such as kaumātua housing and land transferred as part of a Treaty Settlement;
- Emergency, transitional, social and council housing;
- Retirement villages/Rest homes, hospices;
- Employee or student accommodation;
You can read a summary of the changes here
What should you do?
First up, get familiar with the changes and then, if you think you may be impacted – get in touch with the team at ilumin. To assess how much impact this will have on your situation, we can calculate the difference this is likely to make to your overall gains or losses in the years ahead. Our forecasts will be a good guide, but the exact situation will vary depending on several other factors, too. For instance, as interest rate deductibility reduces, you may also find that rents increase to help you meet the higher costs. However, your mortgage interest payments may also go up, if (as seems likely), interest rates increase over that time.
Ideally, you should think carefully about your rental properties and whether they will still be fulfilling their role in your financial strategy. You might choose to keep them – switching from interest-only to principal-and-interest repayments could be a way to start reducing your interest costs over time. Or you could sell up and invest the proceeds somewhere else.
As we said at the start, “Change is the only Constant”, talk to us to get a better understanding of how these latest changes may affect you, so you can make smart decisions about your financial future.