Bright lines and tax rules

15 April 2021

On March 23rd, the Government unveiled its plan to ‘tilt the balance’ and help first-home buyers into New Zealand’s residential property market. Motivated by the significant share of investors in the buyers market, two key changes were announced to reduce investor interest:

  1. Firstly, the Bright-Line Test has been extended to 10 years. This means that any gains made from selling an investment property purchased on or after 27 March 2021 and sold within 10 years of purchase will encounter an effective capital gains tax.
  2. Secondly, the Government will remove the ability for property investors to deduct loan interest progressively over the next four years. The change in deductibles is not being applied to new builds.

Following the announcement, Quinovic Principals Simon Tavendale of Quinovic Palmerston North, David Graham of Quinovic Viaduct and Tessa Keeling of Quinovic Riccarton have shared their thoughts about the Government’s plan and the impact on the rental industry. 

 

Looking for loopholes: are rent increases the answer?

Looking at the immediate impact of these legislative changes, Simon discussed the importance of investors assessing their portfolios as a whole to determine if they can sustain the negative impact on cashflow. This is especially important following predictions of a rise in interest mortgage rates in the near future. Simon noted that “Some investors may be forced to sell down investment properties. They will certainly be reassessing any future purchases. Some investors may look to recover the additional cost by increasing rent.”

The idea of investors increasing rent to counterbalance the effect of the tax changes has been a hot topic since the announcement, with many commentators suggesting this is inevitable. ASB economist Mark Smith predicted investors might need to charge 30% more in rent to get the same return as they would before interest deductibility was removed. In response, Finance Minister Grant Robertson has said the Government would “take action if necessary”, when faced with the possibility of rent caps and/or only permitting an annual rent increase ‘per property’ rather than ‘per rental agreement’. 

Not all locations are equal: who has been hit harder?

David Graham of Quinovic Viaduct pointed out that these changes may be felt particularly strongly in certain areas that have also been affected by Covid-19. Property Investors in the Viaduct, CBD and the fringe of Auckland City have seen a drop in Rental rates of 7 - 10% over the last 12 months. They feel this removal of the Interest deductibility on the investment property is another challenge that was not needed just now.”

On the contrary, Tessa Keeling in Riccarton suggested that investors in areas with competitive housing prices, like Christchurch, are less likely to have borrowed so much and be dissuaded by the extra tax. “Prices of properties in Christchurch are still reasonable compared with the other major cities, so investors may not need to borrow as much down here, which in turn will mean that the extra tax they now need to pay is not significant enough for them not to buy an investment property. If new builds remain exempt from the tax on interest, then we could see an increase in investors buying new builds.”

Referrals increasing for property management professionals

Following the Government announcement, David has already seen a sharp increase in owners seeking out professional property managers and a rise in referrals from lawyers, accountants, financial advisors and real estate agents. Describing the feeling in the market, he says, “most feel that they are losing control over their investment decision, which makes property seem to be a little bit riskier.” For property owners, it can feel like a minefield of legislative rules and regulations and extra costs. “It’s a business now, so owners need to get the right advice from professionals they trust and make sure their team understands their investment goals.” 

Tessa also explains, “it will be even more important for investors to form a strong, trustworthy relationship with a property manager so that we can advise them as to what makes a good rental before they buy.”

Tessa says investors need to be considering: 

  • Which areas to buy in
  • What type of properties will get them a good return over the course of time
  • Quality tenant selection so there are no issues with rent payments or the maintenance of the property, etc. 

The removal of the tax rebate, as well as the possibility of rising interest rates and exemptions for new builds, should also be an influence on your purchase decisions as an investor. Adding a professional property manager to your team will help you navigate this.

Bright-Line Test not major source of concern among investors

In Simon’s experience, “most clients are long-term investors and have a view to hold for more than ten years.”, a sentiment echoed by Tessa and David. As a result, the extension of the Bright-Line Test has not been a huge cause for concern amongst their clients. Tessa says, “So far, not that many are concerned about the Bright-Line test, more about the lack of tax deductibility on interest. I would always advise investors that they should be in property investment for a long period of time anyway.” 

The new tax rules, however, will make it more difficult for first-time investors with lower equity, investors with larger portfolios who have borrowed heavily, and people who are looking to invest and retire within ten years. Simon says, “The new rules certainly make it more difficult for first-time investors with lower equity. They will need to be very clear on their investing goals. Each opportunity will have to be analysed thoroughly.”

It’s essential that anyone who has invested or is looking to invest in residential property is very clear on their goals and what is realistic. Another reason why it’s important to be able to engage with industry professionals who can help you consider your options.. 

Property investment is not a game of ‘set and forget’, and these changes make that more apparent than ever before.

Get in touch with a professional property manager

Managing an investment property is a lot of work and with legislative changes regularly rolling out, it can seem daunting at times. If you feel overwhelmed or confused by recent announcements, simply ask a professional.

At Quinovic, we have over 30 years of experience managing New Zealand properties and we’re passionate about sharing our knowledge. If you have any questions about your rental property, potential investments or how we can help, get in touch with your local office today. We’d love to chat!

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