The government has removed the interest deductibility on residential rental to tackle high house prices and housing affordability. The changes in interest deductibility will, however, have a significant impact on many New Zealanders with increases in rent, resulting in a decrease in housing affordability and savings for retirement.
With the phased removal of interest deductions for residential property purchased on or after 27 March 2021 against income derived from residential rental properties, it will be harder for landlords to cover mortgage repayments and discourage them from investing in residential properties. There are some attempts to address this with interest being allowed on new builds and the provision of social housing and rent-to-own to encourage investment in this area. Will it be enough? It is definitely an interesting experiment!
The change in interest deductibility which will progressively be phased out is a concern for many landlords as it increases the amount of tax owed each year and investors will need to pay for the interest costs incurred out of income that they have already paid tax on. An unintended consequence is that existing landlords that choose to stay in the market will review rentals to cover the increased costs of ownership for the lost interest claim. This means rents will rise further in an already inflationary stage of the cycle, and worsen rental affordability even further.
The only exemptions which investors may take advantage of now are the new build exemptions which can also be applied to purpose-built rentals and also social housing. As unattractive as these options may be, they allow investors to “pivot” their investments towards these areas and potentially sell down part of their portfolio so they can remain an investor without facing crippling tax costs.
I consider these interest deductibility changes a...
