Private property issue #100 - Interest deductibility: Investors to pay less tax

Property investors will soon pay less tax and make more money.

The new government has kept its promise. Interest deductibility will be (mostly) back, starting in 18 days.

What does it really mean? This interview sums it up.

This conversation between Chris Bishop (the Housing Minister) and Jack Tame was on Q+A last Sunday:

Jack – “So this change [interest deductibility] makes housing as an investment class more lucrative?”

Chris Bishop: “That’s partly why we want to do it. Because we need Mum and Dad landlords in the market.”

“A lot of them have exited the market post the interest deductibility changes and that has put pressure on rents.”

Jack – “So you accept that it makes [property] more lucrative as an investment class.”

Chris Bishop – “Well, yes”

Property investors will make more money over the long term.

But these changes will help some investors more than others. Here’s who gets helped most.

Recap: What is interest deductibility?

Imagine that you own an investment property. How much more profitable would it be if you didn’t have a mortgage?

It would be so much more profitable. You’d have a few costs (rates, insurance, etc). But you’d get to keep most of the rent.

Because your property is more profitable, how much tax do you pay? You pay more. It could be $5,000 – $10,000 a year.

Now imagine paying that level of tax, but you still have to pay your mortgage.

You might be losing money on your property becuase of high interest rates.

But, the IRD still sends you a big fat tax bill.

That’s interest deductibility. So, when the rule goes, many investors will be better off.

Who gets the most benefit from the tax changes?

Some investors will see a bigger difference than others. It depends on what you bought when you bought it, and who you rent it out to.

#1 – This investor could save $176k

Bob bought a 1970’s house in Auckland last year.

He faced the new, harsh rules straight away. That’s becuase he bought an existing property after March 2021.

He’s had 0% deductibility. Now he’ll get 80% from April 2024, then 100% from April 2025.

That means Bob will get around $15,000 in tax benefits in the first year since he has an $800k mortgage.

Based on my modelling, he’ll save $176,000 in tax over the next 15 years.

#2 – This investor will be $5,500 better off over the next 12 months

Sally bought a property back in 2020. Like Bob, it’s an $800,000 property in Auckland.

But she hasn’t had to face the full extent of the new tax rules.

That’s because she bought it before March 2021. Last year, Sally had 50% deductibility. In a few weeks, that will go to 80%.

She’ll see a $5,500 tax benefit over the next year.

#3 – This investor has more confidence in the value of their property

Heidi recently bought a New Build. These properties had special benefits under the interest deductibility rules.

They didn’t pay any more tax when the changes came in.

So, what happens when the changes get reversed? Not much changes for Heidi and other New Build investors.

But remember that the ‘special status’ New Builds got only lasted for 20 years. Under the new rules, it will continue forever. So, there is a long-term benefit for Heidi.

She won’t have to think, “What will happen to my property’s value once the 20 years are up?”

#4 – Darryl can now rent his house to anyone

Darryl has an old 1960s bungalow.

When the new tax rules came out, he decided to rent his property out as social housing. This meant he wouldn’t have to pay as much tax.

So he called up the local Salvation Army and offered it to them.

Under the new rules, he can rent the property out to anyone and will not pay any extra tax. So, Darryl has more choices about what he does with his property.

Though he’s happy to keep renting his house out to the Salvation Army at the moment. He knows New Zealand needs social housing.

What will happen to property prices? And are New Builds still worth it?

These new rules will boost to the property market over the next 1 – 2 years.

Though you probably have a lot of questions. Things like –

• What will happen to rents?
• When will property prices start to move?
• And are New Builds still worth it?

I don’t have space to answer these here. But you can get all the answers in our latest episode of the Property Academy Podcast.