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Bright-Line Test & Interest Deduction Changes in Residential Rentals

by | Jun 25, 2021 | Tax Update

Tax Changes

Without any real warning the Government has targeted residential property investors with significant tax changes in an attempt to cool the housing market growth.

In bullet point we set out the changes to the bright-line test and interest deductions on residential rental property. We will follow up when more detail is available.

Brightline Test

  • Property bought on or after 27 March 2021 is now subject to a 10-year bright-line test.
  • New-builds are an exception to this, and will remain subject to a 5-year test. The definition of a new-build is still being worked out; it is intended to include properties acquired within a year of receiving their code compliance certificate.
  • For properties acquired on or after 27 March 2021, including new-builds, there will be a change to the main home exemption in the bright-line rules. If you sell within the bright-line period, and the property was your main home but was used for other purposes for more than twelve months during the time you owned it, you will pay tax on the profit made on sale in proportion to the time the property was not your main home. For example if the property was used as the main home for 6 out of 8 years of ownership then tax would be payable on 2/8ths of the gain on sale.
  • The legislation will ensure that residential properties used to provide short-stay accommodation (eg Air B&B), where the owner does not live in the property, are subject to the bright-line test.

Interest deductions

  • Interest deductibility changes will apply from 1 October 2021.
  • From that date there will be no interest deductions allowed on residential investment property acquired on or after 27 March 2021.
  • For properties owned prior to 27 March 2021 interest deductions will be phased out over the period 1 October 2021 – 31 March 2025. 75% claim 1 October 2021 – 31 March 2023; 50% to 31 March 2024; 25% to 31 March 2025.
  • If money is borrowed on or after 27 March 2021 in relation to an existing property, the interest on this borrowing will not be able to be claimed as an expense from 1 October 2021.
  • Property dealers & developers are unaffected by this change.
  • Non-housing related business loans secured over property are unaffected by this change
  • Note that there is consultation on-going in relation to (1) whether new-builds bought for investment purposes will be exempt from the interest deductibility rules and (2) whether interest paid can be deducted when taxable income is derived on the sale of a property (eg under the bright-line test).

Please contact us should you wish to discuss any of the above in more detail.