Weighing up whether to build new or buy an existing property for a rental can be a difficult decision. Below we outline some of the benefits that new builds that may be helpful determinants for deciding how to invest your money.
Exemptions for bright-line tests
In New Zealand, a bright-line test treats any capital gains on an investment property as taxable income. A capital gain is the profit you make when you sell a property for more than you paid for it. This means if you buy and sell an investment property within a certain timeframe it’s possible you will have to pay capital gains tax.
In order to relieve the strained housing market and give first home buyers a better chance of getting onto the property ladder, the government increased the current brightline from 5 years to 10 years for properties purchased after March 27th, 2021. However, an exemption of this rule for new builds to remain at the 5-year bright-line period was included to encourage investors to focus on new property development to replenish the depleted nationwide housing stock. This means if you invest in a new build and want to sell after 5-years you won’t have to pay capital gains tax – an investor’s dream!
LVR exemptions & Tax changes
Just like the bright-line test, loan-to-value ratio (LVR) restrictions are also more rigorous for investors when buying an existing property versus buying a new build.
An LVR is a measure of how much a bank will lend against a mortgaged property, compared to the value of that property., LVR restrictions for investors lending limits increased further in May 2021 to a maximum of 5% of new lending at LVRs above 70%.
This means the majority of investors are now only able to borrow 70% of the value of the property or properties they want to buy.
Investors are only exempt from these lending limits if they invest in new housing.
What do the tax changes mean?
The draft legislation removes property investors’ ability to deduct mortgage interest from taxes on rental properties. However, new build properties are exempt from the changes.
When do the changes come into effect?
Investors can no longer claim deductions on existing properties bought after 27 March 2021 Deductions for existing properties bought before that date are being phased out between 1 October 2021 and 31 March 2025.
The phasing out of interest deductions works as follows:
|Date interest incurred||% of interest you can claim|
|1 April 2020 – 30 September 2021||100%|
|1 October 2021 – 31 March 2022||75%|
|1 April 2022 – 31 March 2023||75%|
|1 April 2023 – 31 March 2024||50%|
|1 April 2024 – 31 March 2025||25%|
What is a new build?
There’s now more clarity about what is a new build. Investors can deduct interest on properties that received a code compliance certificate (CCC) on or after 27 March 2020. And it also covers existing properties that are converted into several new dwellings, plus commercial buildings converted into residential use.
How long is the new build exemption?
The exemption remains for up to 20 years after the property receives a CCC. Furthermore, the exemption applies to both the initial and subsequent purchasers within the 20-year period.
Immediate healthy homes compliance
Investing in a new build means immediate compliance with the Healthy Homes legislation. A new build will also be of higher quality and a more durable home, reducing ongoing maintenance costs, unexpected bills and will help ensure it remains in good long-term presentation and standard should any future requirements be initiated or your situation changes.