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New tax exemptions make new builds the smarter investment

New rules have purposely made property investment far less profitable – unless you build new. Here’s what you need to know.

Before March this year, investors could claim tax deductions on their mortgage interest costs for rental properties. That was a major incentive – it meant they saved a lot of tax.

New rules were brought in to help cool housing prices and tip the balance towards first home buyers. Landlords can no longer claim those deductions, so mortgage interest eats into their profit margins and makes property investment less attractive. The rules also increased the Brightline test from five to ten years – if owners sell an investment property within 10 years, they have to pay tax on any capital gains.

Build new investment properties, keep more money

Just recently, the government announced an exemption to those rules – all you have to do is build instead of buy. Build a rental or rent out a home built after 27 March 2021, and you’ll be able to claim tax deductions on mortgage interest for up to 20 years. The Brightline test is shorter too – you’ll only have to wait five years before selling to avoid paying capital gains tax.

Part of solving the housing crisis

By making investment in new homes more profitable, the new exemptions could encourage building more homes – something that Sentinel Homes Director Stuart Shutt says our country sorely needs.

“Obviously, we have this housing shortage, and building new homes is really the only way to solve it,” he explains. “It’s great that they’re making it more attractive to build new – you’ll get a better return and New Zealand will be better off as a whole.”

Finance Minister Grant Robertson has said that tax is "neither the cause nor the solution to the housing problem, but it does have an influence, and this is part of the Government's overall response."

And Stu agrees, although he thinks it’s at least a decade too late. Even so, he’s already seeing things change in response to the new rules.

“Professional investors are already changing from buying existing homes to building new,” he says. “The mums and dads will follow suit, as soon as they realise the benefits.”

Good for investors, good for Kiwis

On top of the exemptions, building new comes with a raft of other benefits that make managing investment property easier and more profitable.

“A new home comes with warranties and guarantees, so you’re not facing surprising repair and replacement bills,” says Stu. “They’re also built to healthy-homes standards, so you won’t face costs on retrofitting.”

Perhaps most importantly, renting out new houses means more people are living in warm, dry and healthy homes – conditions that are sometimes hard to find in New Zealand’s aging housing stock.

“It gives you those good feelings, as well as being the smarter option economically,” says Stu. “It makes a whole lot of sense.”

To explore how you could invest in a new build, or to find out if your property is suitable to develop contact the team at Sentinel Homes for a FREE on-site check with one of our subdivision experts.

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