Investor tax rule changes: Government 'will take action' if rents spike, Grant Robertson says

Finance Minister Grant Robertson says Tenants can go to the Tenancy Tribunal if they think rental increases are too high
ROBERT KITCHIN/Stuff
Finance Minister Grant Robertson says Tenants can go to the Tenancy Tribunal if they think rental increases are too high

The Government “will take action if necessary” should investors hike rents to offset the effect of tax rule changes.

Finance Minister Grant Robertson issued the warning after introducing interest deductibility rule changes on March 23, which take away investors’ ability to offset home loan interest costs against rental income.

This ability, which the Government labelled a tax loophole, would be removed for investment properties bought from Sunday and phased in for all rental properties over four years.

ASB economist Mark Smith predicted investors could charge 30 per cent more in rent or pay 30 per cent less for a property to get the same return from a deal compared to pre-rule change.

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When Stuff put these predictions to Robertson, he said the impact on rental prices was complex and uncertain and any estimates at the moment were purely speculative.

Robertson would not comment on whether he would consider national or targetted rental increase caps if landlords did hike prices.

He said for the year to February 2021, Stats NZ recorded rental price increases of 3 percent.

“We will be monitoring the impact on the rental market closely and we will take action if necessary.

Property Investors’ Federation (NZPIF) president Andrew King says some landlords would have to sell after rule changes.
David White/stuff
Property Investors’ Federation (NZPIF) president Andrew King says some landlords would have to sell after rule changes.

“Tenants can also go to the Tenancy Tribunal if they think their rent is too expensive and not in line with the market to request a rent reduction.

“It is also worth noting that the changes to interest deductibility rules for current landlords are being phased in over a four-year period so any substantial price increases would not be justifiable in any event.”

The Government would consult on the detail of interest deductibility proposals and the legislation would be introduced after that, taking effect from October 1.

Investors’ Federation predicts some landlords will have to sell

NZ Property Investors’ Federation (NZPIF) president Andrew King said he expected more investors would have to sell now, but was not able to estimate how many.

“I’m hoping not a lot of people will have to sell, but some will.”

Many new investors who had bought in the last year or two would find themselves unable to afford to keep their property without the ability to claim mortgage interest against their tax bill, he said.

Summer is when most fixed-tenancies renew and new tenancies begin, and King said he expected to see rental price increases.

“It could lead to overcrowding, because tenants may move with each other to try and cope with higher rentals.”

King said if the Government felt it needed to take further action to stall rent increases it would reveal it hadn’t investigated the issue enough before acting.

“If they do bring in something like rent control it’s an indication their policy is not a good one,” he said.

King disputed the Government’s claim that interest deductibility was a tax loophole, and said property investing was now the only industry that could not claim business mortgage interest as a tax deduction.

Government says new rules level the playing field

Robertson said at the March 23 press conference that property investment was often funded by large mortgages, and that investors could write the interest from those mortgages off against income from properties – creating an advantage in the market that home buyers did not share.

“This deduction is not available to homeowners. This loophole has led to more speculative demand, which has pushed up house prices,” he said.

King argued this didn’t constitute an unfair advantage, and said owner-occupiers received the benefit of untaxed accommodation, where rental property buyers received the benefit of rental income which was taxed.

The rule changes

Interest deductions on residential investment property acquired on or after March 27 will not be allowed from October 1.

Interest on loans for properties acquired before March 27 can still be claimed as an expense. However, the amount you can claim will be reduced over the next 4 income years until it is completely phased out.

This means that in the 2025–26 and later income years, investors will not be able to claim any interest expense as deductions against income.