Tax exemption discriminates against ordinary landlords

Housing Minister Megan Woods says upcoming tax legislation will give the exemption to new and existing build-to-rent developments rules in perpetuity.
The exemption will apply retrospectively from 1 October 2021. Owners of build-to-rent assets can claim interest costs relating to these assets for as long as the asset is held and operated as a build-to-rent development.
The proposed requirements for the new asset class include:

Property Investors Federation president Andrew King says it appears the Government has bowed to big business lobbying and changed the rules for large developers turned landlords.

“Minister Woods says build-to-rent developers provide high quality rental housing so these tax benefits are going to benefit high income earning tenants rather than the vast majority of tenants as a consequence.”

King says the vast majority of tenants cannot afford brand new, high end accommodation. “They want well maintained, warm, dry but ultimately good value rental accommodation.”

Build-to-rent is a different model of residential housing to that commonly seen in New Zealand’s current private rental market, where small scale investors own individual or small numbers of dwellings, says Woods.

She says It has the potential to increase the supply of quality rental housing at pace and scale. “Build-to-rent can also support housing construction at times when securing buyers and finance for build-to-sell developments is more challenging, as it is now.

“The build-to-rent sector can attract different forms of long-term investment such as from iwi or superannuation funds. This is critical to providing new general and market affordable supply.”

Woods says the tax exemption will encourage further development of this type of rental supply and enable the full potential of this sector.

However, King says the vast majority of rentals are provided by ordinary Kiwis who own one or two rentals. “They mostly provide an excellent service to their tenants and new laws mean they must provide a warm dry rental homes. These private landlords operate with low overheads and low (often negative) margins that actually

provide true value for tenants. These are the rental that should be supported, not large corporate developers.

He says unfortunately, the discriminatory removal of interest costs as a legitimate tax deduction has seen the cost of many rental properties increase and will continue to increase as the taxes are increased over the next four years for the majority of rental properties.”

The federation’s published plan to fix the rental crisis include removing the three tax increases of disallowing mortgage interest as a tax deduction; ringfencing and the Brightline test would provide some real relief for the majority of tenants.

King says tenants groups have said there is a rental, but allowing mortgage interest deductibility for high-end rentals will not solve anything for the majority of tenants, it should apply to all rentals.

The federation has also suggested introducing a security of tenure model based on the German system and this would provide long-term security for the majority of tenants, not just for high-income tenants who are likely to benefit.

Comments from our readers

On 16 August 2022 at 2:01 am Don Clarkson said:

Totally agree! We have a block of 6 one-bedroom apartments built in the 1970's. They are all renovated, meet all the healthy homes standards, and most of our tenants have stayed long term. Up until a couple of years ago 5 of our 6 tenants had been there over 20 years! By it's nature it's a "build to rent" complex and rented below market rent to those who can't afford the higher end of the market.
But because it's only 6 flats it doesn't meet the criteria and so our tenants will have to pay higher rents to cover the extra tax we will have to pay. Not fair - to us or them!

On 16 August 2022 at 11:29 pm Terumi Kamata said:

I am quite disappointed with the inconsistency of the policy and the strategy. I have been providing houses to my current tenants over 5-10 years without much increase in rent unlike some other speculators despite a 19% increased rate and doubled interests. With this non deductible interest paid to the bank, I will most likely need to increase a few hundred dollars per week to cover the tax payable to the government and I will most likely lose my current long term tenant. I still struggle to understand the purpose of this legislation (non deductible interest payable to the bank as an expense).

On 17 August 2022 at 7:36 am Peter Lewis said:

Terumi, you cannot rent-increase your way out of the extra tax burden.
If you need an extra $100 to cover the tax you actually have to increase the rent by $150, as the extra rent is, in itself, taxable,

On 22 August 2022 at 10:26 am Heather Miller said:

Huge mistake by current government. They are punishing the small investor financially because they want to give financial incentives to Developers to build more homes.

On 27 August 2022 at 12:19 pm tim@claudatos.co.nz said:

I own a 3 flat x 2 bedroom complex. I lease the land from the Regional Council. The lease has just risen by 145% resulting in rent increases of over $70 per week, per flat. The tenants are not that concerned as they just apply to DSW for the increase.
So in my opinion
1) a local Govt. body has no obligations to its rate payers in times of a housing shortage to perhaps hold off any lease increases and
2) the real rent payer is the tax payer, you and I.

Tax exemption discriminates against ordinary landlords

Giving build-to-rent developers an exemption from the Government’s tax rules removing interest costs as a tax deduction discriminates against ‘mum and dad’ investors, says the Property Investors Federation.

Monday, August 15th 2022, 4:11PM 5 Comments

Comments from our readers

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