I could hear the collective sigh of relief from property investors when the current government announced the recent changes to the tax and tenancy rules.
When managing any business Cash Flow is King but even more so when you’re a property investor. With property prices so high most investment properties are purchased with 65% funding. With the current interest rates around three times what they were at their lowest in 2021, and with only gradual relief expected later this year, it is challenging to achieve a yield of more than 2%-3% and have it cash flow positive, if you’re not smart about it.
Yes, rents are increasing but only modestly compared to the increases in council rates, insurances and interest rates. What is not included in the yield calculation is the sudden increase in income taxes investors have faced over the past 3 years due to the declining non-deductibility of funding interest costs. At 20% for the last financial year this must have led to a cash flow crisis for most investors who then find themselves locked into owning their property for at least 10 years otherwise they pay capital gains tax on the sale.
It’s little wonder potential investors are sitting on their hands waiting for change.
The great news is that changes are afoot. Maybe not suiting all investors but they do make sense.
The financial changes are:
Interest Deductibility
This will be phased back in over the next two years.
– 80% of interest costs can be claimed for this current financial year from 1st April 2024
– 100% of interest costs can be claimed from next year 1st April 2025
Tax Trust Rate
For all trusts earning over $10,000 the tax rate will increase from 33% to 39% from 1st April 2024
Brightline Test
This is the min. years you must own an investment property before being charged Capital Gains Tax if sold.
As of 1 July 2024 the Brightline test will revert back to 2 years from the current 10 years.
Commercial Building Depreciation
The ability for investors to claim depreciation on Commercial Buildings is being removed from 1st April 2024
AirBnB GST Rules
From 1st April 2024 all Airbnb rates for short term accommodation sold through a digital platform must include 15% GST. If your income from all taxable supplies is less than $60,000 you do NOT need to be GST registered however GST will still be charged by AirBnB and a portion paid out to you. However if your income increases above $60,000 you must be registered. This adds a level of complexity to your accounting so please seek professional advice to ensure you do NOT run foul of the IRD.
Other relevant changes relating to tenants & landlords:
Tenancy & Landlord Notice periods
Tenants are required to give 21 days notice if they wish to vacate a property – now reduced from 28.
Landlords are required to give 42 days notice if they or a family member intends to move into the property – previously 63. If they plan to renovate, develop or sell the property they must give 90 days notice.
Pet Bonds
Where tenants have pets a landlord can ask for an additional 2 weeks bond to cover any potential damage caused by the pet or additional cleaning required.
90 Day No-Cause Evictions
A landlord can evict a tenant without giving a specific reason.
Property investment is not for the faint hearted. From a regulatory standpoint there is a lot you can’t control however there is a lot you can. So build a good team of specialists around you – an expert property accountant and lawyer, property manager and experienced mortgage adviser, to keep abreast of the ever changing legislation and lending rules that greatly affect your bottom line. Not to forget having a great team of tradies (plumber, electrician, builder & handyman) to deal with the maintenance issues which crop up at the most inconvenient times.
Property Investment is a serious business and a long term journey that can be very rewarding, but also challenging and costly if you get it wrong.
