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ANALYSIS – The new coalition government has announced a suite of tax reforms, including reintroducing the ability for property investors to deduct the interest costs on their mortgages against their rental income.
Early criticism of the proposed changes has focused on its retrospective nature (it will be backdated to 1 April, 2023), potential windfalls to landlords (at the expense of tenants), and the fiscal cost of the measure.
Missing from much of the coverage was mention of the previous Labour government’s policy being extremely punitive to some landlords, without necessarily bringing the claimed benefit of improving housing affordability. In fact, it is likely to have put upward pressure on rents.
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Alongside the reinstatement of interest deductions, National’s plan to reduce the applicable period of the brightline test – which requires property owners to pay income tax on property sold within a certain time frame – from ten years back to two years.
While property investors will benefit from the proposed changes, there have been some real issues with Labour’s earlier tax reforms. We should be glad to see them gone.
Denying deductions on residential properties
In 2021, the Labour government announced plans to phase out the deduction of interest against income derived by residential landlords.
These changes meant landlords couldn’t offset interest payments against their rental income. If the property was later sold, the accumulated interest costs would then become deductible against any taxable gains.
Much like the extension of the brightline test from five to ten years, proponents of this