The National-led government has confirmed that interest deductibility will soon return. This means some property investors will pay less tax.
But the trouble with interest deductibility is that the tax calculations are complex and they impact property inventors differently.
Some will save tens of thousands of dollars a year, others will save nothing at all.
That happens because there are different rules based on when you bought your investment property, what you bought, and who you rent your property to.
To illustrate this, imagine three houses next to each other. They’re all identical; all three are worth $800,000 and have a $600,000 mortgage. Each is rented out for $700 a week and the owners have the same interest rates.
The only difference is the houses were bought at different times and are rented out to different people.
Yet, one of these three investors will be $152 a week better off under these rules. While another will be no better off at all.
This investor saves $152 a week
Peter and Sally bought the first of the three houses. They purchased it in April 2021, directly after Labour announced the new tax rules.
Because of this, they’ve had no interest deductibility over the last few years. They’ve borne the brunt of the rules straight away.
When the rules change, they’ll get 80% deductibility over the next 12 months. This could save them $7,896 in tax in the first year alone. That’s $152 a week.
Because Peter and Sally paid a lot of tax under the interest deductibility rules, they get the most benefit.
These investors save $38 a week
Next door, Kendra and Shae bought the second house, which again has the exact same mortgage, rent and interest rate.
The only difference is that this couple bought their investment property 2 months before, in February 2021. That means they get a slightly different set of tax rules.
Over the last year, Kendra and Shae have been able to deduct 50% of their interest costs when calculating their tax. On April 1, that will go to 80%. That will save them $38 a week.
Kendra and Shae don’t save as much on tax because they didn’t pay as much tax to begin with. They didn’t face the full effect of the interest deductibility rules in the first place.
These investors save nothing at all
The last of the three houses is owned by Deborah and Honi.
When they bought the house they decided to rent it out through the local Salvation Army, which is a social housing provider. That gave this last property a special tax status. Deborah and Honi have been able to deduct all their interest costs. This meant they dodged the impact of the interest deductibility changes.
Once the tax rules switch back, nothing changes. They will continue to deduct all their interest costs. This means there is no difference in the amount of tax they pay.
In each of these 3 scenarios, the investors had identical properties, with the same mortgage, the same interest rate and the same rent. All that changed was the date they bought the property and who they chose to rent it out to.
Yet, one investor will save $152 a week, and another will not be any better off.
That might sound unfair, but the investors who will be better off are the ones who already faced the full effect of the rules to begin with.
Rather than creating an uneven playing field, these changes make the rules fairer. It means that no matter when you bought the property and no matter who you choose to rent it out to, the same tax rules apply to all property investors.
