Is the interest deductibility policy reinstated this month fair? How much these landlords can save each year

 

Interest deductibility has been reinstated this month, but what will it mean in practice? First, let’s look at the policy’s background.

 

In 2021, the Labour Government announced it would phase out investors’ ability to deduct mortgage interest expenses from rental income for tax purposes, aiming to cool New Zealand’s heated housing market. Labour described the interest deduction rules as a policy “loophole” that treated different home buyers unfairly. The change applied immediately and in full to all properties purchased after 27 March 2021. For properties already held as investments, interest deductibility would be phased out. In the tax years ending at the end of March 2022 and before month 3 of 2023, 75% of interest could be claimed as an expense. In the tax year that has just ended, only 50% could be claimed. New builds were exempt from the change.

 

Now, the new National-led Government is reversing this approach. Interest deductibility for property investors was formally reinstated this month. In the current tax year, 80% of interest can be deducted from income, increasing to 100% next year. Restoring this tax relief means eligible landlords will effectively reduce their tax bills.

 

The difficulty with interest deductibility, however, is that tax calculations are very complex and the effects vary between property investors. Some could save tens of thousands of New Zealand dollars a year, while others may see little difference. This is because property types, purchase dates and tenants’ circumstances differ, resulting in different amounts of relief.

 

 

To illustrate these differences, let’s consider three neighbouring houses:

 

Suppose all three houses cost NZ$800,000, each has a mortgage of NZ$600,000, and each is rented for NZ$700 a week, with the same mortgage interest rate. The difference is that the three houses were purchased at different times and rented to different tenants。Under the new deduction rules, one of these three investors will receive a tax reduction of NZ$152 a week, while another will receive no tax reduction at all. Let’s examine why three landlords investing in identical properties would face such different outcomes.

 

 

Peter and Sally bought the first of these three properties in April 2021, just after Labour announced the removal of interest deductibility. As a result, they have been unable to claim tax relief and have been the most affected by the policy.

 

The good news is that over the next 12 months, they will be able to deduct 80% of their interest costs. In the first year of the policy’s restoration alone, this will save them NZ$7896 in tax, equivalent to NZ$152 a week.

 

The owners of house 1 will benefit most because they paid substantial amounts of tax under the rules being abolished.

 

 

Kendra and Shae bought house 2 as an investment property in February 2021, when Labour had just announced the tax changes. This means the couple have been operating under slightly different tax rules.

 

Over the past 12 months, they could deduct 50% of their interest costs when calculating their tax. From 1 April, that proportion rose to 80%, saving them NZ$38 a week.

 

They will not save much tax from the policy change because they were not paying as much tax to begin with.

 

 

The last of the three properties is owned by Deborah and Honi. After buying it, they decided to rent it out through the local Salvation Army, a social housing provider. This arrangement allowed them to deduct all their interest expenses, effectively avoiding the impact of the removal of interest deductibility in March 2021.

 

Now that the tax rules have changed again, they will continue deducting all their interest expenses, so the amount of tax they pay will remain unchanged.

 

 

Opes Partners’ resident economist Ed McKnight said these outcomes might sound unfair, but the investors benefiting most were those who had been affected by the rules in the first place. In his view, rather than creating an uneven playing field, the changes made the rules fairer and more reasonable. They meant the same tax rules applied to all property investors, regardless of when they bought their properties or whom they chose to rent them to.

 

YIJU also interviewed several property and finance professionals about the issue:

 

 

Gavin Han

Barfoot & Thompson real estate salesperson

 

Gavin Han：I believe restoring interest deductibility could have a positive effect on the housing market. We have already received some encouraging market feedback, with many investors who have been watching the market for some time considering a return. First, it will increase investors’ interest in property and could encourage more investment property purchases and sales. Second, because investors can deduct interest from income, persistently high borrowing costs will have less impact on their cash flow. This could increase sales volumes and prices for some types of homes.

 

Of course, every policy change brings challenges to the housing market, leaving buyers and sellers uncertain and making informed decisions more difficult. We therefore recommend that buyers and sellers follow market developments and consult professional real estate agents to make the best decisions about their property transactions.

 

Sarah Liu

Bayleys real estate salesperson

 

Sarah Liu：I believe restoring this policy has had a positive effect on the housing market, particularly for property investors. If one investment property saves more than ten thousand dollars in tax a year, an investor with ten properties could save more than a hundred thousand dollars annually. This will improve investors’ ability to afford investment properties and encourage many to retain those they already own, providing some support for housing prices. Recently, I have noticed more cash buyers becoming active and an increase in enquiries about investment properties.

 

Of course, there is no denying that the biggest factor affecting the market remains when high interest rates will fall, as this directly affects investors’ ability to afford property purchases.

 

York Zhang

General Manager of Huarong Finance and senior mortgage adviser

 

York Zhang：I believe the implementation of interest deductibility is a major positive development for the property industry this year. First, it restores normal commercial principles to property investment by allowing interest to be deducted as an investment expense, rebuilding investor confidence. Second, it is very helpful for investors’ cash flow over the long term and has a positive effect on the investment market. Third, it reduces the likelihood of existing investment property owners selling in future. If people find that holding an investment property means continuing losses, they will sell, which also creates instability in the rental market. Finally, I do not think this policy is likely to provide a substantial stimulus or have a marked effect in the short term, because the main source of mortgage pressure remains high interest rates. The pressure of the high-interest-rate environment has yet to pass, and it affects the real burden of weekly or monthly repayments. Over time, however, I believe the policy will have a greater effect once interest rates fall.