Megan Woods: Owners of long-term rentals will get the tax breaks back. Photo/Mark Mitchell
The government has flip-flopped on the parameters of rental housing policy, backing away from scrapping landlord tax breaks.
Housing Minister Megan Woods today announced that owners of more than 20 rentals in one development, offering tenancies of 10 years or more, will now be able to claim mortgage interest deductibility.
This is to encourage this sector to thrive, she said, citing the fast-growing build-to-let sector.
Last year, the government announced that it would remove the benefits landlords enjoyed: the deduction of interest paid on mortgages for rental properties from their tax bills, which encouraged PAYE workers to buy rentals in order to reduce their tax bills.
The changes were first announced last March.
The end of the breaks sparked outrage from landlords, including Ockham Residential chief executive Mark Todd, who said he feared he would be forced to sell 85 apartments.
The change in tax policy has led to gloomy predictions from various interest groups that they will cause the maximum exodus of investors from the residential real estate market.
But homeowners buying a brand new property could still claim their mortgage interest as a tax deductible expense for up to 20 years.
Owners of existing older properties would not be able to recover tax on the interest portion of mortgages for rental units.
Today, Woods framed the U-turn in positive terms.
“We are granting an exemption from the interest limitation rules to certain types of new and existing construction developments for rent in perpetuity,” she said.
To be eligible, developments must offer tenants leases of at least 10 years. Tenants can request shorter agreements if they wish and the development will still qualify for the exemption. Tenants may terminate their lease at any time, subject to 56 days’ notice.
“We believe that security of tenure is essential for people who rent. This requirement will allow people to settle in and personalize their home, reduce the frequency with which they have to find new accommodation and all moving costs. associates, especially as people face the costs of life challenges and help them build and maintain connections with their community,” she said today.
“We recognize the important role that the build-to-let sector can play in filling a gap in the general rental market by increasing the supply, density and diversity of housing.
“Aotearoa New Zealand needs to build more homes where they are needed and at prices affordable to low-to-moderate income households. Building for rental can help continue the current momentum of new supply and improve quality rental units with new homes that are warm, dry and safe,” she said.
A spokesman for Woods denied it was a turnaround because the announcement on interest deductibility last year indicated the minister would do more work on the construction sector for rent.
Leonie Freeman, chief executive of the Property Council, welcomed the turnaround.
“Today’s announcement is one of the best levers to unlock the potential of build-to-let. We support the government’s drive to allow build-to-let to provide warm, dry rental accommodation that provide Kiwis with long-term security of tenure,” she said.
Woods said the legislation would be presented to parliament at the end of August.
The Herald reported how Woods was seeking policy advice to encourage the build-to-rent market.
Last November, Todd of Ockham said the government wanted to eliminate mortgage interest deductions on loans for purpose-built rental properties, which would put existing urban properties in Ockham at a huge disadvantage to be built for rental.
Teachers and emergency service workers were among the buildings’ long-term tenants, but may have to find new homes if Ockham sells, he said.
“It’s weird that [Housing Minister] Megan Woods supports the BTR sector to provide more new, warm and safe occupancy properties, but [Revenue Minister David] Parker is happy to kill vendors who already follow government policy,” Todd complained last year.
“I could be forced to sell 85 rental units worth $60 million to $80 million if the interest, which is the main cost of owning these buildings, becomes non-deductible,” Todd said, referring to the apartments that the company owns at Sandringham, Gray Lynn, Ellerslie and Mt. Albert.
On a single project, Ockham could lose a $500,000 mortgage interest tax deduction, he said. He cited a $22 million development 50% funded by an $11 million loan, resulting in annual interest charges of $500,000, Todd said in November.
The rental construction industry is growing rapidly at home and abroad.
Thousands of new build apartments for rent in Auckland are planned and many are being developed by NZX-listed Kiwi Property, expanding in Sylvia Park and due to start soon in its LynnMall.
Greg and Helen Reidy’s Reidy & Co and Kim Barrett’s Resident Properties are also developing apartments to be built on three sites in central Auckland and bought an Ockham block a few months ago.
Reidy said he expects the first three apartment buildings to have a total value of about $210 million.