Proposed changes to the bright-line rules and interest deductions

Today the government announced changes to the bright-line rules and interest deductions in an effort to promote new residential builds and curb the hot property market. 

Proposed changes to the Bright-line rules :

  • The government has announced it intends to extend the bright-line period to 10 years for residential property except newly built houses (new builds).
  • Inherited properties and those which have been the owner's main home for the entire time they owned it will continue to be exempt from all bright-line tests. 
  • There will be consultation on what will be considered a new build over the coming months, but it is intended to include properties acquired within a year of receiving their code of compliance certificate under the Building Act 2004.
  • There are changes to the treatment of times when a property is not the owner's main home by introducing a "change of use" rule and the legislation will also ensure residential properties used to provide short stay accommodation, where the owner does not live in the property are subject to the bright-line test and cannot be excluded as business premises. 
  • Other land sale rules still apply, for example the rules that apply to speculators, land developers and dealers.

For further information click here

Proposed changes to interest deductions on residential property income:

  • Currently when owners of residential investment property calculate their taxable income they can deduct the interest on loans that relate to the income from those properties. This reduces the tax they need to pay.
  • The government has agreed to change these rules and will consult on the detail of these proposed changes and legislation will be introduced shortly thereafter. 
  • Consultation will cover an exemption for new builds acquired as a residential investment property, and whether all people who are taxed on the sale of a property (for example under the bright-line tests) should be able to deduct their interest expense at the time of sale.
  • The legislation will apply from 1 October 2021
  • Interest deductions on residential investment property acquired on or after 27 March 2021 will  not be allowed from 1 October 2021. 
  • Interest on loans for properties acquired before 27 March 2021 can still be claimed as an expense but these deductions will be phased out over 5 years.

For further information click here


Please note: The above E-newsletter notes and the related articles on our website are of a general nature and therefore we urge clients who may be affected by these changes to contact us to discuss your specific circumstances before making any changes or drawing any conclusions.

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