Upcoming property related tax changes

The legislation containing the Government’s long-awaited property tax changes was passed into law on 28 March 2024. While most changes were expected, there were a number of new changes.

If you own commercial buildings or residential rental properties, we have summarised below the key changes you should be aware of:

Removing commercial building depreciation

 The tax depreciation rate on commercial and industrial buildings (with an estimated useful life of 50 years or more) will revert to 0% with effect from the 2024-25 and future income years. A tax deduction can continue to be claimed for depreciation on fit-out.
This change may need to be factored into your provisional tax calculations for the 2025 tax year.

Restoring interest deductions for residential rental properties

Interest deductibility on residential rental properties was being phased out over several years, however the new Government is restoring deductibility as follows:

• 80% of interest will be deductible from the 2024-25 income year
• 100% of interest will be deductible from the 2025-26 income year

This applies to all residential rental properties, regardless of when they were purchased.

For the 2023-24 income year, the status quo remains, that is, for residential rental properties:

• acquired before 27 March 2021, only 50% of interest is deductible
• acquired on or after 27 March 2021, no interest is deductible
• 100% of interest is deductible if the property is a new build

Bright-line rule changes

The bright-line rule is the rule that taxes the gain on sale of certain residential property if the property is sold within a certain period. There are three key changes to the bright-line rules.

1. The bright-line period is reduced to 2 years

This change applies to disposals of residential land where the bright-line end date (generally the date a sale and purchase agreement to sell is signed) occurs on or after 1 July 2024.

Essentially, this means that a residential property acquired before 1 July 2022 will no longer be subject to the bright-line rule when it is sold if an agreement to sell the property is entered into on or after 1 July 2024. If an agreement is entered into before 1 July 2024, the sale will be subject to the bright-line rule unless an exemption can apply.

A property acquired on or after 1 July 2022 will now be subject to a 2-year bright-line period, which means the bright-line rule will only need to be considered if a contract to sell the property is entered into within 2 years of settlement date (different rules apply for non-standard sales such as ‘off the plan’ sales).

2. Main home exemption reverts to predominate use

The main home exemption is changing from its current ‘proportionate use’ basis back to its former ‘predominate use’ basis.

This means property which is used predominantly for a person’s main home, for more than 50% of the time the person owns the property, will not be subject to the bright-line rule. However, this also means that if the property does not meet the main home criteria, all of the gain on sale will be taxable, rather than just a portion of the gain under the previous main home rule.

A further change is that where a property is under construction, the construction period is ignored when determining if the main home exemption applies.

3. Extension of roll-over relief

Bright-line rollover relief is where certain transfers of property can be ignored for the bright-line rule.

Roll-over relief is being extended to include all transactions between ‘associated persons’, limited to one transfer during a 2-year period.

From 1 July 2024, rollover relief will apply to:

• • transfers of property between persons that are associated with each other under the associated person rules, provided they have been associated for at least two years prior to the transfer
  • a transfer to a trust where all beneficiaries (other than charities) have been associated with the transferor for at least two years (other than infants that are less than two years old and persons that are associated due to a recent marriage or adoption).

 Talk to our experts

While the above changes have gone some way to simplifying the bright-line rules, the rules are still complex and we recommend you discuss your property transactions with your Nexia advisor. 

Nexia is one of New Zealand’s best accounting and business advisory firms with offices in Christchurch, Auckland and Hawke’s Bay.