The Government is changing the way residential property is taxed in a bid to stabilise house prices and make it easier for first-home buyers to get into the property market.

The changes mainly impact properties acquired from 27 March 2021 onwards however there are impacts on all residential property investments.  The term acquired in this context means the date the agreement is signed by both parties.

Extension of bright-line test to 10 years

The bright-line test - the tax on residential investment property - will be increased from five years to 10 years, meaning if you sell your residential property within 10 years you will be required to pay income tax on any profit made through the property increasing in value. Inherited property will still be exempt and the bright-line test is expected to remain at five years for new-build investment properties.  

Although the family home exemption will still exist, it will no longer be all or nothing. Instead, if you do not live in your family home for a period exceeding 12 months then, if you sell within the bright line period, tax will be paid on a portion of any profit made.

The new rules will apply only to residential properties acquired from 27 March 2021 onwards.

Interest deductions on residential property income

For loans used to purchase residential properties, property owners will no longer be able claim interest as an expense against their income from those properties.

If you acquire a property before 27 March 2021, the amount you currently claim will be gradually reduced over the next five years until you cannot claim any deduction. If you acquire a property from 27 March 2021 onwards your interest deductions will only be allowed until 30 September 2021.

Changes to First Home Grant

The First Home Grant thresholds will increase for both first-home buyer income and property price caps.

The new income thresholds will be $95,000 for singles and $150,000 for couples. In Tauranga, the price cap for a new build will increase from $550,000 to $600,000 and for an existing property from $500,000 to $525,000.