Tax shake-up targets property investors

The Government announced a range of measures which in their view address the supply and demand for residential properties (in addition to measures already in force such as the ring-fencing of residential rental property losses).

Each of these have the potential to have a major impact on anyone who currently owns, or is considering transacting in, a residential property. The announcements do not apply to commercial properties.

The three main announcements are:

• Intention to remove interest deduction on residential properties from 1 October 2021

• Increase to the bright-line test from 5 years to 10 years effective from 27 March 2021

• Changes to the main home exemption from bright-line test

Interest Deductability

A surprise move to change tax deductibility on rental properties has come as a shock to property investors. Owners of investment properties can no longer offset loan interest payments against rental income when calculating how much tax they have to pay.

This will apply to all investment properties - for existing rentals purchased before March 27 2021 you can still claim interest on pre-existing loans as an expense against your residential property income, but it will be gradually be phased out over the next five years.

This will have an impact on you if:

• You own a rental property.

• You own an Airbnb or family holiday house.

• You are about to buy, or you’re planning to buy, a second property.

If you fall into any of these categories, the equations on your properties are now likely to have changed, so get in touch and we can run the numbers for you under the new tax rules. Once you have the right information, you can decide whether to make changes to your investment strategy or the way you use your properties.

Bright-line test extended

The other major tax change had been forecast for some time: the bright-Line test is now extended from 5 years to 10 years. This applies to residential property acquired on or after 27 March 2021. Now, if you buy a second property and sell it within 10 years, you will be taxed on any gains. The timeframe for new builds is 5 years. This does not apply to your family home, unless you occupy it less than 50% of the year.

This may also have an impact on your plans for investing in property, so talk to us about what the new tax rules will mean for your situation.

Changes to the main home exemption from bright-line test

For residential properties acquired on or after 27 March 2021, including new builds, the Government intends to introduce a ‘change-of-use’ rule. This will affect the way tax is calculated if the property was not used as the owner’s main home for more than 12 months at a time within the applicable bright-line period.

For detailed information you can refer to the Government's media statement and fact sheets on the bright-line test and interest deductions. The devil will be in the detail and we are expecting further information as these changes unfold.

If you are unsure how these changes affect you or would like some clarification, please contact us today for more information. In the meantime, we will continue to keep you updated.