New Zealand property investors will see another tax advantage disappear soon. On Tuesday, the Government of New Zealand revealed they’ll limit mortgage interest deductions. The plan goes into effect October 1 and is hoping to lower the incentive to speculate with housing. This measure follows a series of actions to discourage speculators. The government says they have already seen early signs of success.
New Zealand Drops Tax Incentive To Curb Property Speculation
New Zealand released its draft legislation to limit the deduction of mortgage interest. Currently, property investors can deduct mortgage interest from their income taxes. This gives them a big incentive by boosting returns. By eliminating the deduction, the idea is to drive more productive investment. When capital starts to flow in other directions, it will slow and stabilize home price growth.
There are a few exemptions:
- The main family home (aka principal residence).
- Certain types of property, including purpose-built apartment buildings.
- New builds and property development.
The Exemptions Are To Help Build Further Housing Stock
It’s tricky to strike the right balance of curbing speculation and allowing investment. They aren’t trying to eliminate new housing investment, hence the new build exemption. However, this leaves the opportunity for speculators to exploit. It’s a tough one, and even the Treasury expressed concerns.
In the Regulatory Impact Statement, the Treasury criticized the exemption. If new builds received one, they suggested a very short time limit. If this becomes an issue, I have a hard time seeing them not cracking down on this area in subsequent measures.
Measures Rolled Out This Year Have Begun To Cool The Market
The New Zealand Government has rolled out a number of measures to curb speculation. The “bright-line” test is one that got a shout-out in today’s announcement. Previously if someone sold a home less than 5 years after buying it, the gain would be taxed like income. This test determines if you would be subject to that tax. Now the timeline has been pushed to 10 years, lowering the incentive to flip even further.
On Tuesday, the Treasury updated the public on reception to the “bright-line” changes. “Early indications suggest that enthusiasm for existing residential investment properties might be waning,” they wrote.
Deputy Prime Minister Robertson added, the measures today are intended to level the playing field even further for first-time home buyers.
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