Latest tax changes: how do they affect you?

A suite of changes aimed at reducing house price inflation and increasing housing supply were announced on March 23, including two changes to the taxation of property.

The five-year bright-line test was extended to 10 years, which means that regardless of intention, that any profit on a property (that is not a main home) sold within ten years of acquisition will be taxed at the personal tax rate.

The other tax change, which is far more significant for property investors, removes interest deductibility. This means investors will no longer be able to offset their mortgage interest expenses against their rental income, when calculating their tax.

For some investors, this will mean rental properties that previously paid for themselves will no longer do so, which ultimately makes property investment a far less attractive proposition.

How might these changes affect homeowners?

What about bach owners?

Baches or second homes are not covered in the main home exemptions and you will be required to pay tax on the profit of the sale if sold within 10 years.

However, new builds are exempted from the 10-year bright-line rule, so if you’re looking to build a bach, or other property, you’ll only be subject to a five-year bright-line rule.

Important things to know

The 10-year bright-line rule may seem like a big deal if you’re either looking at buying a second home, a rental property, a bach or changing the use of your main home for an extended period. But it’s important to remember that any profit you make on the sale of a property within that period will only be taxed at your personal tax rate.

So, if your property increases by $100,000 in value in the period before you sell it, you’ll have to pay personal tax on it in the tax year that you sell it, at the tax rate which applies to your total personal income for the year.

You don’t have to give away all of the profit, and if for some reason your property doesn’t increase in value - then there’s no tax to pay on it.