PHOTO: For Rent. FILE
The Inland Revenue Department (IRD) is taking steps to ensure that property investors have a clear understanding of and comply with the new tax deductibility rules. Through campaigns and integrity checks, the IRD aims to help investors “get it right” in their tax obligations.
SPONSORED: Fergs Coffee – GUARANTEED FRESHNESS OR YOUR MONEY BACK
Eugene Bartsaikin, Director of Twine Financial Advisers and mortgage adviser, expressed concerns about the removal of mortgage interest cost deductions as an expense, coupled with declining property prices, which has left many investors in a difficult situation.
John Cuthbertson, New Zealand tax leader at Chartered Accountants Australia and New Zealand, emphasized the need for caution in phasing out interest deductions over time, particularly for loans established before March 27, 2021.
The new rules, which eliminate the ability of investors to offset mortgage interest against rental income for existing properties, were introduced in 2021 but are being implemented gradually over several years.
For the tax year ending on March 31, 2023, investors were able to claim 75% of their mortgage interest as an expense. This percentage reduces to 50% starting from April 1, 2023, and further to 25% from April 1, 2024. Finally, from April 1, 2025, mortgage interest will no longer be deductible.
The IRD has recently utilized various marketing campaigns, including promotions on its LinkedIn page, to remind landlords about the interest limitation rules. Additionally, integrity checks have been conducted to ensure compliance among customers.
2023 PRICING: Profile YOU on this website! – FOR 12 MONTHS | ONLY $999 plus GST
An IRD spokesperson stated that the focus of their marketing campaign this year is to remind customers about the rules and clarify how the phasing works for properties acquired before March 27, 2021. The spokesperson also confirmed that, based on the integrity review conducted so far, many customers and tax agents are correctly applying the rules.
To increase awareness of the rental tax changes, the IRD has employed advertising, direct communication, and educational initiatives on their website, including webinars and seminars. Customers have also been reminded to complete both their income tax return and IR3R form.
SPONSORED: Looking for a real estate database from $99 plus gst? | SALE
Eugene Bartsaikin recently discussed the concept of “mortgage prisoners” and commented on the tax deductibility rules for rental properties. He referred to the denial of interest deductions as a “tax on the interest rate” and highlighted the challenges faced by investors who purchased properties under the previous tax laws. Bartsaikin noted that with the changes in deductibility and declining property prices, many investors are currently unable to profit from their properties.
Affordability and cash flow have become major concerns for property investors, making it difficult for landlords to pass on increased costs to tenants. Bartsaikin explained that rental rates are not as directly linked to expenses as they were previously assumed to be.
John Cuthbertson clarified that the interest limitation rules do not apply to a taxpayer’s primary residence, as it falls under the “private limitation.” Homeowners can still claim a prorated interest deduction if they receive income from flatmates, with the regular interest deductibility provisions applying.
Cuthbertson advised advisers not to underestimate the complexity involved in interest calculations, particularly with revolving credit or multi-use arrangements. He highlighted the practical disconnect between tax requirements and commercial banking arrangements, stressing the importance of considering the information needed, time required, and associated costs of compliance.
The National Party has confirmed that if elected into government during the October general election, it intends to reinstate tax deductibility rules for rental properties.
Interested in supporting propertynoise.co.nz?