14 April 2021

Property Investment
Navigating the property market tax changes

Let’s be honest: when it comes to the property market, we’re all looking for a deal. Whether it’s selling, buying or investing, the numbers need to stack up, and that includes the numbers we can get back.

This means the recently announced changes to the bright line test and the changes to the tax on investment properties, affect us all. So it’s important we understand what exactly those changes are.

Clinton Hardy, Lugtons’ general manager, takes a look at the ever-changing landscape of the property market.

The bright line test

First of all, a quick overview of the bright line test. In short, it’s the tax on capital gains made from the sale of a house that has been bought and sold within a certain period of time (two years, five years, now 10). As is the case for most rules, there are exemptions. Those exemptions are on properties which are the owner’s main family home and properties that have been inherited.

The bright line test first came into effect in New Zealand in 2015 and the tax (which is calculated as income tax on the profit amount) was imposed on any home bought and sold within two years, as long as it wasn’t the owner’s main address of residence. This was extended to five years in 2018 and has now been further extended to 10 years.

April’s changes to the bright line test now mean homes which aren’t used as the owner’s main residence for more than 12 months at a time, are subject to tax if sold within 10 years. The tax is calculated on the time it is not used as a main home.

Seeking financial gain

Why the change? There’s no denying that the New Zealand property market has seen record sales prices of late, in particular these past six to eight months. Here in the Waikato, that trend has been no different. At the end of Q1, Waikato’s house prices had increased 19% compared to the same time last year.

The New Zealand Government wants to address what it terms unsustainable housing prices by reducing the perceived tax benefits on secondary residences, in the hope it will open the market to first home buyers.

“It’s important to remember that there are multiple factors contributing to the movement within the property market,” says Hardy. “These latest changes announced by the New Zealand Government will have an effect, but a good house or investment property purchase will still stack up. Buyers may just have to dig a little deeper to find those purchases where the numbers are right for them,” he says.

Tax on investment property

Speaking of investment properties, that’s another of the changes announced this April. One of the many attractions of owning a rental property, other than the additional income and capital gains that could be achieved, was the ability for investors to offset the interest from their mortgage against their personal tax bill.

For properties purchased from 1 October 2021 onwards, that’s no longer achievable. Properties purchased before that date will still be able to have interest claimed as an expense; however, the amount an investor can claim will be reduced over the following four years. Property developers who pay tax on the sale of a property are excluded from this change.

“We predict this will really hit the mum and dad investors hard, unfortunately,” says Hardy. “Being able to offset the cost of the interest was a significant benefit. It’s not to say that property isn’t still worth investing in, it absolutely is, but it has just got slightly harder to come by those properties where the numbers really are in your favour.”

Buyers who can invest in a property without a mortgage - about 12% do - won’t be affected.

The silver lining

As with any change, it always pays to look for the silver lining. Property still remains a viable purchase, whether for a family home or as an investment property. Granted, the latter now involves further consideration, but the purchase of a family home hasn’t been affected.

“These changes will just require buyers seeking an investment property to be sure about whether or not the numbers work for them,” says Hardy. “But that’s certainly something to discuss with our Lugtons sales team. Having the criteria determined from the outset will enable us to match you with the properties that tick the boxes.”

“And if it’s a family home you’re looking for, there continues to be plenty of those in the Waikato market which our team are more than happy to help you find.”

First home buyers

One change for the good is the Government has made it slightly easier for first home buyers to take their first step on the property ladder. Income caps for the First Home Loan scheme have increased to $95,000/year for one person and $150,000/year for two people. “This means more first home buyers will qualify for the first home grant and that’s exciting to have this group of buyers entering the market,” says Hardy.

Speak with our Lugtons team today for your next property purchase.

Request for Free Market Appraisal

Thinking of selling your home?
Contact us for a free, no obligation market appraisal

Learn more