Latest tax regulations set to severely impact ‘mum and dad’ property investors as end of year accounts roll in

The full impact of new tax regulations for residential property investors are about to be truly felt as their 2021/2022 financial accounts are prepared, according to a leading residential investment sales professional.

Bayleys Canterbury residential investment specialist Angela Webb says the shrinking tax deduction allowance for interest on mortgages underpinning rental properties is the most intrusive business legislation she has experienced in 20-years in the industry.

Previously, interest on mortgages for residential investment properties could be claimed as a business expense. However, the interest deduction clause is now being reduced on a sliding scale. From October 2021 through to the end of the just completed 2021/2022 financial year, and for the full current 2022/23 financial year, investors will only be able to claim 75 percent of mortgage interest payments.

The deductibility rate falls to 50 percent in the 2023/2024 financial year, 25 percent in the 2024/2025 financial year, and to a zero-deductibility rating after that.

“The introduction of this new IRD stipulation will particularly hit small ‘mum and dad’ investors who have worked hard to own a couple of properties to save for their retirement,” said Webb, who has her own portfolio of residential investment properties in Christchurch.

“As ‘middle New Zealanders’, their personal incomes are often ‘modest’ – so they can’t personally absorb these higher tax costs. Expect to see rents rising over the coming months or in more extreme cases, rental properties coming up for sale as investors financially digest the full ‘bitter pill’ impact of restricting their ability to run their property asset profitably.

“For most, as we have only just completed the last financial year, the full extent of the new IRD regulations will not have hit home yet, so investors need to be discussing this with their accountant now and preparing themselves for the implications of this change, so they aren’t hit with an unexpected tax bill.”

Webb said the new IRD tax imposition was “head and shoulders” above at least five other legal requirements which residential property investors have had to initiate and manage over the past 11-years. Webb has been actively making her Bayleys Canterbury residential investment clients aware of the changes.

“Firstly, the Healthy Homes legislation stipulating the installation of heat pumps and extractor fans in residential units has been expensive – but it has had the benefit of making improvements to investor’s real estate asset and providing better housing for tenants. And consequently for some, the ability to charge higher rental rates in due course,” she said.

“Secondly, ring-fencing losses on residential properties had an impact. However, allowing investors to manage that across their portfolio meant that if you owned a balanced portfolio, you could offset the losses against income-producing properties and save up the losses for when a property makes a profit as rental incomes increase.

“Thirdly, the brightline property ownership timeline imposition never really had much impact on residential investors as for the overwhelming majority of investors, their focus has always been to hold assets for a minimum of five years… and usually much much longer. Brightline was really designed to capture traders, developers and speculators who work short term for quick gains.

“Next, limiting the definition of chattels and restricting depreciation on residential rental properties was also a ‘speed hump’ which, while frustrating, could be managed by most investors.

“And capping of the raft of operational ‘handbrakes’, the change in allocating who pays property management agency letting fees – transferring the liability from tenants to owners, also led to another revenue-limitation element being heaped on owners.”

However, Webb said that the newly introduced sliding interest repayment tax allowance removal was the must gutting for investors, as the loss of potential bottom-line income benefitted no-one. Taking into account the multiple other added operational burdens placed on investors, it would also make it difficult for many to raise their rents to cover the income deficit in the short to medium term.

“It is simply a punitive move targeting those who have not only sought to provide for their own futures, but are providing a much-need community service, housing, to those who need it,” she said.

“My advice for the past year to all of my clients has been to talk directly with their accountants about just what it will mean for them, and how they can best mitigate the outcomes.”

Webb said the new tax changes would have little impact on investors within her network holding large property portfolios – funded with low mortgage debt as a result of operating substantial cash-flow business models.