Well, finally, we are here. The election is upon us, and never before has there been a political choice that will have such a profound impact on residential property investors’ fortunes as this one.
Labour, in their pursuit of making housing more affordable for first home buyers, implemented two significant policies: extending the Brightline to 10 years and removing interest deductibility from residential housing. While they achieved their price-related objectives, the impact on interest rates was less clear.
These twin policies essentially amounted to a targeted capital gains tax on residential investors and a significant denial of legitimate expense deductibility, resulting in a profound impact on the residential property market. Property investors found themselves targeted mercilessly as the house price inflation, fueled by cheap COVID-era money, was wrestled back into the bottle.
The question arises: would the increase in interest rates alone have been enough to curb house price inflation without the added denial of interest deductibility? We may never know, but one thing is certain—Labour shows no intention of restoring the deductibility of interest. Furthermore, despite the unprecedented rise in rates and the failure to implement a broad-based capital gains tax, there is no plan to reduce the Brightline.
The consequences have been stark: investors have been conspicuously absent from the market since these policies were rolled out. Building an investment portfolio of existing property with borrowed money became an unfeasible proposition when tax was levied on gross rental income, yet mortgages still had to be serviced from after-tax cash flows. The equation simply did not work.
These tax changes, introduced without warning, have had massive detrimental impacts and numerous unintended consequences. Rents have surged as the supply of rental accommodation from the private sector dried up, and landlords were forced to pass on extra costs to struggling tenants.
The result has been a surge in the development of high-intensity, low-quality new build dwellings, encouraged by the new tax settings. Additionally, complexity and compliance costs have skyrocketed for those attempting to navigate the tax changes, which included three separate Brightline changes and two different main home exemptions.
Even the ability of Kiwis to undertake sensible estate planning has been undermined by Brightline impacts that can only be mitigated by applying highly complex rollover relief provisions to everyday transactions. Parents looking to assist their children in property ownership faced Brightline tax problems as they contemplated the best way to provide help.
In this challenging landscape, National’s Chris Luxon has announced his party’s tax policy with a vision to restore functionality to the private rental sector. Currently dysfunctional, National plans to return the Brightline to its original 2-year term from 1/7/24, not as a quasi-capital gains tax, but as a measure to strengthen intentional speculation provisions in the land tax rules.
Surprisingly, National’s plan includes retroactive changes to the Brightline, meaning that anyone who bought a property before 1 July 2022 will no longer be subject to Brightline—a welcome relief for many.
However, the news is not entirely favorable regarding interest deductibility. Instead of being fully restored from a specific point, it will be phased back in. Starting from 1 July next year, interest deductibility will be at 50% under National but only 25% under Labour. In 2025, National plans to lift deductibility back to 75%, and from 1 July 2026, deductibility will be fully restored. It’s not perfect, but it’s progress.
Absent from National’s policy was any mention of the removal of residential loss ringfencing. This means that tax losses resulting from the restoration of interest deductibility cannot be offset against income other than rent. Nevertheless, investors can take solace in the fact that they won’t be taxed on rental incomes that were essentially cash losses.
In conclusion, there is a stark contrast between the two parties’ approaches. The upcoming election holds the promise of change that could restore some basic fairness to the tax system and strip away the negative influence of tax-driven social agendas on tax policy.
See you on the other side.