Tax regulations

Latest tax regulations set to have a severe impact on ‘mom and dad’ real estate investors as year-end accounts roll in

The full impact of the new tax regulations for residential property investors is about to really be felt when preparing their 2021/2022 financial accounts, according to a leading residential investment sales professional.

Bayleys Canterbury residential investment specialist Angela Webb says the cut to the tax deduction for interest on mortgages underlying rental properties is the most intrusive business legislation she has seen in 20 years in industry.

Angela Webb, residential investment specialist at Bayleys Canterbury

Previously, interest on mortgages for residential investment properties could be claimed as a business expense. However, the interest deduction clause is now reduced on a sliding scale. From October 2021 until the end of the 2021/2022 financial year which has just ended, and for the whole of the current 2022/23 financial year, investors will only be able to claim 75% of the payments of mortgage interest.

The deductibility rate drops to 50% in fiscal year 2023/2024, to 25% in fiscal year 2024/2025 and to a zero deductibility rate thereafter.

“The introduction of this new IRD stipulation will particularly affect small ‘mom and dad’ investors who have worked hard to own a few properties to save for retirement,” said Webb, who has his own portfolio of residential investment properties in Christchurch.

“As ‘average New Zealanders’, their personal incomes are often ‘modest’ – so they cannot personally absorb these higher tax costs. Expect to see rents rise over the next few months or, in more extreme cases, rental properties to sell off as investors financially digest the full impact of the ‘bitter pill’ of restricting their ability to manage their asset real estate profitably.

“For the most part, as we have only just completed the last financial year, the scope of the new IRD regulations will not yet have served its purpose, so investors should discuss this with their accountant now and prepare for the implications of this. change. , so that they are not hit with an unexpected tax bill.

Webb said the new IRD taxation was “head and shoulders” above at least five other legal requirements that residential real estate investors have had to initiate and manage over the past 11 years. Webb has actively made his Bayleys Canterbury residential investment clients aware of the changes.

“Firstly, the Healthy Homes legislation stipulating the installation of heat pumps and extractor fans in residential units was expensive – but had the benefit of making improvements to the investor’s property asset and providing better housing for tenants and therefore, for some, the ability to charge higher rental rates in due course,” she said.

“Second, cantonment losses on residential properties have had an impact. However, allowing investors to manage this across their entire portfolio meant that if you had a balanced portfolio you could offset losses against income-producing properties and save losses when a property makes a profit as rental income increases.

“Third, the imposition of a clear land ownership schedule has never really had much of an impact on residential investors, because for the overwhelming majority of investors, their goal has always been to hold assets for at least five years… and usually much longer.Brightline was really designed to capture traders, developers and speculators who work in the short term for quick gains.

“Secondly, limiting the definition of movable assets and restricting the depreciation of residential rental properties was also a ‘speed bump’ which, while frustrating, could be handled by most investors.

“And the capping of the series of operational ‘handbrakes’, the change in the allocation of who pays the property management agency’s rental fees – the transfer of responsibility from tenants to landlords, has also led to another element of income limitation on landlords.”

However, Webb said the new removal of the rolling interest repayment tax deduction was a must for investors, as the loss of potential income benefits no one. Given the multiple other additional operating costs imposed on investors, it would also be difficult for many of them to increase their rents to cover the income shortfall in the short and medium term.

“This is simply a punitive measure targeting those who have not only sought to secure their own future, but are providing a much needed community service, housing, to those in need,” she said.

“My advice for the past year to all my clients has been to speak candidly with their accountants about what this will mean for them and how best to mitigate the results.”

Webb said the new tax changes would have little impact on investors in his network holding large real estate portfolios — funded by low mortgage debt due to operating substantial cash flow business models.

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