What do the new interest deductibility limits mean for new builds?

October is well behind us, which means that Labour’s new interest deductibility rules have officially kicked in. But what do they mean for property investors? This is one of the two major property law changes introduced in 2021. The first was the bright-line test extension implemented earlier this year, means that investment properties sold within ten years of purchase incur high income tax on the profit – a five year increase on what was previously enforced. Find out more about it here.

The second is the limitation of interest deductibility. And while that might sound foreboding, there’s no cause for alarm – these rules haven’t mitigated opportunity, but simply shifted the goalposts. Read on to find out what it means for the property market.

What do the interest deductibility rules mean?

Historically, investment property owners were able to offset the costs of their mortgage interest through tax reductions. The new rules aim to limit and ultimately remove this option. Finance Minister Grant Robertson stated that these were part of the measures taken to curb investor interest in existing properties and help first-home buyers get on the property market.

According to David Parker, Revenue Minister, property owners who purchased an existing residential investment property on or after 27 March 2020 will no longer be able to deduct the cost of their interest. For any properties acquired before this date, interest deductibility will be restricted in phases over the next four years – and eventually removed altogether.

Ultimately, this will result in property investors paying more for rental properties which, according to the government, will make these properties less appealing.

Now, it’s worth noting that both ministers use the term ‘existing properties’ – an important distinction. These interest rules aren’t meant to make life hard for investors; rather, they aim to shift the focus towards new builds.

New opportunities

These properties will be exempt from Labour’s new property laws (including the bright-line test, so they can be sold after five years instead of ten), meaning those who invest in new builds will be able to continue to claim interest deductibility in full.

But what is ‘new’? According to the government, any property that receives (or received) its code of compliance certificate on or after 27 March 2020 is exempt from the law changes. This exemption remains in effect for the next twenty years, and not only applies to the initial buyer, but to any successive buyers within this timeframe.

Housing Minister Megan Woods said that “the exemptions for new builds and for property development will ensure the interest limitation rules do not reduce the ongoing supply of new housing.” The government wants to increase housing construction by incentivising investment in new properties. 

Quality investments

New builds have always been attractive investment options. They benefit from the latest in construction technology, so they’re more durable, which means cost efficiency. They’re more popular, garnering widespread interest from potential renters or new buyers. And now, with the benefit of ongoing interest deductibility (a factor that’s enormously appealing with increasing mortgage rates), they’re also poised to be far more lucrative rental properties compared to existing homes.

All these factors will likely increase the demand for new builds, which could also translate into higher return on investment.

To make the most of these rules and invest in high-quality housing, take a look at property and land packages offered by Golstruct Homes. If you have any questions, get in touch with our expert team.