39 percent of New Zealand homeowners have at least one investment property according to data collected from a combination of property titles and companies office records.
With this in mind, the recent government legislation changes which came into effect on the 1st October 2021 will have a huge impact on the ‘mum and dad’ investors, as well as those investing as a profession.
So what does the law change mean?
Currently, owners of residential investment property are able to deduct the interest expense applied to loans associated with the income as a tax deductible business expense. This means higher expenses and less tax to pay.
The new changes mean that claiming interest will be phased out completely by April 2026.
The key date to remember is the 27th March 2021. If you acquired an investment property after this date, then from the 1st October 2021 you cannot claim any interest as part of your financial returns. Interest on loans for properties acquired before the 27th March 2021 can still be claimed, however the amount you can claim will be reduced over the next 4 financial years as below:
Any investors should also be aware that if they borrow money after the 27th March 2021 to maintain or improve a property that was acquired before that date, then the interest is treated the same as an acquisition made after the 27th March.
So what happens to the percentage I cannot claim?
You will need to ensure that your interest expense is divided between the percentage you are able to claim (which will be coded as a tax deductible interest expense) & your shareholder drawings account. When reviewing your profit & loss you should see a decrease in your interest expense meaning an increased net profit.
Cadence Bookkeeping can help ensure you remain compliant with recent law and legislation changes. Recording the correct percentage of interest that relates to your investment properties. Great record keeping throughout the years means less questions & a lower bill from your accountant.