Our Accountants Update – Tax Changes for Residential Property Investment

Read the latest update announced by the Government on Tuesday 23rd March 2021 – The following overview from our Accountant highlights the main changes to come from this announcement and the future impacts on your property investment. 

The main changes are as follow:

Brightline changes

• If you sell a residential property within a certain time frame you will need to pay income tax on any profit. This is called the Brightline test.

• The Brightline test has been extended to 10 years (currently 5 years) for any residential properties acquired on or after 27/3/2021.  

• The definition of “Acquired”: For tax purposes, a property is generally acquired on the date a binding sale and purchase agreement is entered into.

• New builds are subject to a 5-year Brightline test.

• The main home exclusion has been amended which would require tax to be paid on gains made for periods the property is not used as the owner’s main home.

Changes to interest deductions on residential income

Interest will no longer be deductible against residential property income.

• The legislation will apply from 1 October 2021.  

• Interest deductions on a residential investment property acquired on or after 27 March 2021 will not be allowed from 1 October 2021. 

• Interest on loans for properties acquired before 27 March 2021 can still be claimed as an expense. However, the amount you can claim will be reduced over the next 4 income years until it is completely phased out, as shown in the table. This means that in the 2025–26 and later income years, you will not be able to claim any interest expense as deductions against your income.

•  Property developers (who pay tax on the sale of property) will not be affected by this change. They will still be able to claim interest as an expense.   

For example:

A property acquired before 27/03/2021, The Interest expense is 15,000 per annum – The profit before tax will increase every year until 31/03/2025, therefore the tax to pay will increase progressively. 

Or:

A similar property acquired after 27/03/2021, The interest expense is also 15,000 per annum – The profit before tax will increase from 01/10/2021 and therefore the tax to pay will increase. 

Talk to your tax advisor about what these changes mean for your specific situation.