Home > Updates > Property Tax changes – are you up to speed with all the recent updates?
There have been several key changes in the property tax area in recent months; from the removal of commercial property depreciation and reinstatement of interest deductibility, to significant changes to the bright-line rules. Here is a brief overview of each to bring you up to speed.
The deductibility of commercial building depreciation has been a bit of a yo-yo over the past decade or so. From the 2024-25 tax year, the depreciation rate on commercial buildings which have an estimated life of 50 years or more has changed back to 0%. Essentially, we are back in the position we were in for the 2012 – 2020 income years.
For commercial building owners, this will mean potentially higher tax bills and close attention being paid to the calculation of 2024-25 provisional tax for owners whose residual income tax for the year will be more than $60,000. This is because Inland Revenue charges interest on underpaid provisional tax if the residual income tax has not been paid by the third instalment date. The third instalment date is 7 May 2025 for March balance date taxpayers and can be as early as 28 November 2024 for taxpayers with a non-standard 31 October balance date.
Fit-out can continue to be depreciated separately. If fit-out was not separated from the cost of buildings acquired during the 2020-21 to the 2023-24 tax years, Inland Revenue will allow these tax returns to be amended to depreciate fit-out separately.
The bright-line test is the rule that treated gains on residential rental property sales as taxable if the property is sold within 10-years of purchase and an exemption doesn’t apply. When first introduced in 2015, this rule was a 2-year period, which then increased to 5-years in 2018 and then 10-years in 2021. Over the years, the exemptions have been changed and new rollover exemptions introduced, resulting in quite a minefield of tax rules for the humble rental property owner.
From 1 July 2024 the complexity of the bright-line rules is being simplified. The key change being the return of the 2-year bright-line period (and the removal of the 5-year and 10-year bright periods) from 1 July 2024.
The 2-year rule will apply where the ‘bright-line end date’ is on or after 1 July 2024. The bright-line end date is typically the date a sale and purchase agreement is signed to sell the property (non-standard sales may have a different bright-line end date).
The 2-year rule means that the bright-line rules won’t apply if the property has a bright-line end date on or after 1 July 2024 and the ‘bright-line start date’ is not within 2-years of the bright-line end date. The bright-line start date is typically the date title is transferred, although non-standard purchases can have a different start date.
For example, Joe Bloggs received title to a residential rental property on 1 February 2022 and then signed a sale and purchase agreement to sell the property on 10 July 2024. Joe Bloggs will not be subject to the bright-line test because there is more than 2 years between Joe’s bright-line start date (1 Feb 2022) and Joe’s bright-line end date (10 Jul 2024). If, however, Joe did not receive title to the property until 1 September 2022, Joe would still need to consider the bright-line test as there would be less than 2 years between the bright-line start (1 Sept 2022) and end (10 July 2024) dates.
The main home exemption to the bright-line rules has had numerous iterations over the past 9 years. From 1 July 2024, the main home exemption will apply if the property has been used for more than 50% of the time as the person’s main home and more than 50% of the area of the land has been used for the main home. If the property was a new home, the construction period is ignored when calculating the 50% use.
It is an ‘all or nothing’ test and is based on actual use, not intended use.
To ensure ‘serial flippers’ don’t benefit from the exemption, a person can’t use the exemption more than twice in 2 years, or if they or their associates have a regular pattern of buying and selling.
Various roll-over exemptions were introduced in recent years to exempt property transfers from the bright-line test. From 1 July 2024, those roll-over exemptions are being removed and replaced with a broader exemption that treats all transfers between associated persons as exempt from the bright-line rules, so long as the transfer takes place at no more than the transferor’s cost, and the parties have been (in general) associated for at least 2 years.
This change was to recognise that transfers between associated parties typically do not represent the types of speculative transactions the 2-year bright-line test is intended to capture. However, the way the roll-over exemption has been worded, the full benefit of the exemption appears to only apply if the transfer occurs within the 2-year bright-line period, which doesn’t align with the intention of the exemption. Therefore, we strongly recommend advice is obtained before relying on this exemption.
With the high cost of land, in recent years it has become more common for people to pool their resources and purchase land together, and then subdivide the land and each take title to a subdivided section. Inland Revenue previously held the view that this would trigger the bright-line test when the new titles were transferred into each co-owner’s name. After taking consultation, Inland Revenue has now changed its view and will not treat the transfer of titles to co-owners as being subject to the bright-line test so long as the subdivided land is allocated to each co-owner in proportion to the co-owner’s original interest in land before it was subdivided. This treatment is retrospective and applies from 27 March 2021.
The deductibility of residential rental property interest costs is being phased back in over the next two years with the effect that the interest limitation rules will no longer apply from 1 April 2025. Specifically, 80% of interest costs will be deductible from 1 April 2024 and 100% of interest costs will be deductible from 1 April 2025. There is no change for the 2023-24 tax year; deductibility remains at 50%.
For taxpayers who were previously denied any interest deductions (e.g. for rental properties purchased on or after 27 March 2021 or rental properties with overseas mortgages) interest deductions will be allowed (i.e. 80% from 1 April 2024 and 100% from 1 April 2025).
There has been no change to the residential rental loss ring-fencing rules, therefore if the relaxing of the interest limitation rules results in a rental loss for the property, this loss will still be ring-fenced. This means the rental loss can only be offset against rental income from another rental property, or carried forward to offset future rental property income.
Given the extent of changes to the property tax rules, and to avoid any hidden surprises, we strongly suggest you obtain specific advice regarding any tax implications before entering into property transactions.
For personalized assistance navigating these property tax changes, to ensure compliance and optimize your tax strategy, please reach out to one of our trusted Nexia Advisors. We have a team of tax consulting specialists across our offices in Christchurch, Auckland, and Hawke’s Bay, ready to help.
Nexia is one of New Zealand’s best accounting and business advisory consultancy firms offering the full range of accounting, advisory, audit, tax and insolvency services. Nexia New Zealand has offices on Victoria Street in the Christchurch CBD, Albany and Newmarket in Auckland, and Hastings in the Hawke’s Bay.
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