Property economist Kelvin Davidson says bringing back interest deductibility for homeowners may slow down rent growth but lowering rent will always be at the discretion of the landlord.
“Pricing decisions will go down to the individual (landlord) all the time,” he says.
“And that’s regardless of what’s going on with taxes. But there are wider pressures at the moment in terms of demands for rental properties and not that many properties out there.”
What is interest deductibility?
The interest deductibility rule refers to the mortgage interest rates applicable to rental properties owned by investors.
For individuals who own rental properties with mortgages, the interest payments made on those mortgages can be subtracted from their rental income when determining their tax liabilities. This results in a reduction of taxable income, leading to lower tax payments.
In 2021, the Labour government removed the deductibility of mortgage interest.
Labour eliminated the option for property investors to balance out interest costs with rental income. This decision was framed as a measure to curb investor interest in existing properties and to create a more equitable environment for first-time homebuyers. Certain exceptions were made, including properties classified as new constructions or involved in social housing initiatives.
Changes under the new government
Associate Finance Minister David Seymour has announced a reversal of the changes made by the Labour government to the interest deductibility rules. However, this reversal will not stick tp the timeline outlined in the coalition agreement between the ACT Party and the National Party.
The coalition agreement initially pledged to reinstate interest deductibility, with a 60% deduction in the 2023/24 financial year, followed by an 80% deduction in 2024/25 and full restoration to 100% in 2025/26.
Now, the government has committed to allowing landlords to claim 80% of their interest expenses starting from April 1, 2024, followed by the full 100% from April 1, 2025. This adjustment means landlords will not be able to claim these expenses retroactively.
Who benefits?
Talia Anderson-Town from Silks Audit Chartered Accountants says beneficiaries of the resurrected rule will be evident over time.
“That’s the major talking point at the moment, whether that deductibility will benefit the investor, or whether it will benefit the people that occupy these rental properties... And that’s up to the individual for them to choose what they want to do.”
“I’ve seen a lot of people convert their summer homes into fulltime rentals so people can occupy them most of the time. And that’s one of the things with the current market. People are willing to turn them into full-time rentals, not just for the income but also to provide a whānau with a roof over their head because there is a demand.”