Property Investment Rules are Changing

Posted 18 Apr

Property Investment Rule Changes in 2024


Article appears under: About Property Investment



There are a lot of changes to tenancy laws and tax treatment of investment properties. Most of these are reversals of law changes introduced by the previous two governments, while the pet bond rules are something new. Below I give a brief run through on what is coming including my own opinions on the changes. 

If you would like more information, I highly recommend getting a digital membership - caled "APIA TV" (or a full membership if you like in the big smoke) to Auckland Property Investors Association. They put out a ton of educational content, where industry experts weigh in on changes. Memberships are tax deductible and there are loads of other benefits. You can pick one up here

Interest Deductibility

The interest deductibility phase-in has been announced. For this FY just started existing properties are back to 80% and then everything is back to 100%. From the coalface, investors I'm chatting with are taking the long view and seem to be ignoring interest limitation rules for purchasing decisions looking forward.

My take: Hooray! I was squarely in the "this is a tenant tax" camp and rental supply would have further cratered if this rule had stayed. As it is, we will feel the effects of the sheer number of homes that went out of the rental pool for a decade. Good riddance.

Bright-line Test

The bright-line test is being reset to 2 years as of July 1. You should speak with your accountant to confirm your bright-line status, as well as for other items such as depreciation recovery before entering into an agency or S&P agreement.

My take on this: The 2-year test was originally brought in by National to stop one thing: traders masquerading as buy and hold investors. 2 years works for that because no trader will voluntarily sit on stock for 2 years. Anything longer distorts the market as it disincentivises people from selling a property sooner.

I am ambivalent about a future CGT if it allows for inflation. It might deter people making bad investments in the hope of future gains, but that hasn't happened elsewhere, so it probably won't, and property markets eventually absorb these taxes. Either way, if a political party wants a tax, then call it a tax and have a vote on it.

Pets & Pet Bonds

National announced a new framework (legislation pending) to make it easier for tenants to have pets, and at the same time have a pet bond covering for potential damages. Auckland PIA released some simple slides that explain things well. More details to come. 

My (initial) take on this: It seems sensible at the surface level. Hopefully, between this bond and insurance, a landlord is no longer financially at risk for allowing pets. 

90-day no-cause Termination to be Brought Back

Some details here, but in a nutshell this re-introduces the owner's right to end a tenancy with 90 days notice, without having to give a reason.

My take: The previous changes meant it was difficult to end a tenancy that had gone bad. When the previous government removed this right to terminate, many in the industry (myself included) lodged submissions that it would reduce rental availability to tenants who could be "perceived to be risky". This is exactly what has happened, and I believe this is one reason emergency housing waiting lists exploded. 

At the same time I'm a bit uneasy because during a housing boom, people do lose their rentals as they are sold, and the rules were introduced to (in theory) increase the security of tenure. BUT, I saw no evidence of any real positive impact from the rule changes, because:

  1. Giving 90 days' notice to sell a property vs the previous 42 did not change a vendor's mind about selling, it simply meant the process took longer, and;
  2. Unless you are selling, there is no reason to remove a tenant unless they were problematic, and;
  3. Tenants who could be perceived as "risky" had much less access to a rental property - trapping many in emergency housing situations.

We need to remember that owners pay letting fees now in a rule change that will not be reversed. One of the big issues was tenants would lose a rental AND need to pay to enter another one. This is on the owner now, so there is a financial cost to ending a tenancy and beginning a new one. 

Fixed-term tenancy changes

Landlords will once again be able to end a fixed-term tenancy (and offer a new fixed term). Changes introduced under the previous government meant that the owner could not prevent a fixed-term tenancy from converting to a periodic tenancy by default.

Also introduced in the name of security of tenure, the previous rule meant that unless a tenant accepted another fixed term, their tenancy would automatically convert to a periodic. Once the rule is reversed, the landlord will be able to offer a new fixed-term tenancy should they wish to. 

My take: This rule played havoc with the student rental market, where residents rent for 12 months but often go home for the summer. Unfortunately, the owners have 12 months of mortgage and rates payments, so this rule did not suit the student rental market at all.

My comment about letting fees applies here too. Why go and re-let your property every 12 months when it is far easier and cheaper to sign up for another 12 months?

Summary

Overall I am in favour of the changes, bearing in mind a lot of detail has yet to come through. 

The flood of converting standard homes to social housing to sidestep the interest limitation rules was just one example of an "unintended-but-obvious-to-anyone-who-thought-about-it-consequence", as was owners becoming much more picky about their tenants, thus leading to an even bigger flood of people lining up to live in those homes. Taxpayers are now subsidising a massive social housing industry, which while it does good work, doesn't need to be this big. 

Lastly the above opinions are my own. They probably don't all align with yours, which used to be fine but these days can trigger something close to road rage. If after a short walk you are still upset with anything I have put here, flick me an email ;-)


Nick Gentle
Business Owner & Operations Manager
nick@ifindproperty.co.nz
027 358 3855


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