Controversial landlord tax changes become law

Paul Francis doesn’t want to raise the rent on his two rental properties, but says he has to because of new rules around interest deductibility which became law on Tuesday.

The Whakatane landlord says he and his wife “worked their guts out” at their day jobs, as well as renovating old houses and selling them, for 30 years in order to own their rentals.

“They are lovely houses, and we charge less than market rent for them, because we have the best tenants a landlord could hope for, and we want to give them a break.”

But the two rentals have a combined loan on them, and the new rules mean the interest on the loan, which used to be tax-deductible, will no longer be, he said.

“It’s a huge blow which leaves us with no choice but to increase rents on both by $30 a week. We considered selling up, but that would leave our tenants without homes, so we don’t want to do that.”

The new rules were aimed at cooling the housing market, but all they had done was prompt landlords to increase rents to cover their costs, Francis said.

“That means the new rules are mean spirited not just for landlords, but for tenants too as they haven’t helped anyone.”

Last March the Government announced it would remove interest deductibility for rental properties. This meant landlords would no longer be able to write off their interest costs against the tax on their rental income.

Initially, the new rules would apply only to properties bought after the announcement, but they would be phased in to apply to all rentals by 2025. New builds, properties rented to Kainga Ora, land businesses and property development will be exempt.

But the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Bill, which contained the interest deductibility changes and the extension of the bright line test, only passed its third reading in Parliament to become law on Tuesday.

On presenting the bill for its third reading, Revenue Minister David Parker said the ability for investors to deduct interest costs on rental property income was a huge tax break.

It was one of the reasons house prices had become so inflated, and it gave investors a tax advantage over first-home buyers when buying property, he said.