ANALYSIS: The National-led Government has brought back interest rate deductibility for property investors, which means some landlords are in line to pay less tax.
But the trouble with interest deductibility is that the tax calculations are complex and they will affect property inventors differently. Some will save tens of thousands of dollars a year, others will save nothing at all.
This is because the rules will vary according to property type, date of purchase and who is renting the property.
To illustrate this, imagine three houses next to each other. They’re all identical. All three are worth $800,000 and have a $600,000 mortgage. Each is rented out for $700 a week and the owners have the same interest rates.
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The only difference is that the houses were bought at different times and are rented out to different people. Yet, one of these three investors will be $152 a week better off under the new rules, while another will be no better off at all.
House No.1
Peter and Sally bought own the first of the three houses. They purchased it in April 2021, directly after Labour announced it was scrapping interest rate deductibility.
Because of this, they have never been able to claim back tax on their interest rate payments. They’ve borne the brunt of the rules straight away.
They’ll get 80% deductibility over the next 12 months, which could save them $7896 in tax in the first year alone - that’s $152 a week.
Because Peter and Sally paid a lot of tax under the soon-to-be scrapped regime rules, they stand to benefit the most.
House No.2
Next door is the investment property bought by Kendra and Shae in February 2021, just before Labour announced the tax changes.
That means the couple have been operating under a slightly different set of tax rules.
Opes Partners resident economist Ed McKnight: "The trouble with interest deductibility is that the tax calculations are complex and they will affect property inventors differently." Photo / Fiona Goodall
Over the past 12 months, they have been able to deduct 50% of their interest costs when calculating their tax. As of April 1, this has gone to 80%, which will save them $38 a week.
They won’t save as much on tax because they didn’t pay as much tax to begin with.
House No.3
The last of the three houses is owned by Deborah and Honi.
When they bought the house they decided to rent it out through the local Salvation Army, which is a social housing provider. That gave their property a special tax status. Deborah and Honi have been able to deduct all their interest costs, which meant they dodged the impact of the interest deductibility changes in March 2021.
Now the tax rules have switched back, nothing changes. They will continue to deduct all their interest costs, which means there is no difference in the amount of tax they pay.
The outcomes of the above scenarios might sound unfair, but the investors who will be better off are the ones who already faced the full effect of the rules to begin with.
Rather than creating an uneven playing field, these changes make the rules fairer. It means that no matter when you bought the property and no matter who you choose to rent it out to, the same tax rules apply to all property investors.
- Ed McKnight is the resident economist at property investment company Opes Partners
