Tax Incentives for Developers and Subsequent Owners to Boost Long-Term Rentals

On 12^th August 2022 the Government announced a new policy which will provide tax incentives for developers for long term rentals also referred to as built to rent properties. The tax incentives will include an exemption from interest limitation rules for developers for newbuilt as well as existing properties. In order for development to qualify for the incentive the development needs to:

offer long term residential rentals of at least 10 years. The tenant does not need to accept the 10 year term and can shorten the rental term. As long as a 10 year tenancy is offered the exemption from interest limitation will apply,
there must be 20 dwellings in one or more buildings that comprise a single development, whether or not held in one title or multiple titles,
the dwellings are used or available for rent under the Residential Tenancies Act 1986; and,
explicit personalisation policies must be offered, over and above the Residential Tenancies Act 1986.

Whilst the tenants will be able to break their tenancy agreements at any time by providing a 56 day notice period, this will not be the case for the landlord. The interest limitation rule will not apply to a subsequent owner of the property, provided that the property is operated as built to rent property.

For existing built to rent properties interest will not be phased out. Taxpayers that hold existing built to rent properties will not be subject to interest phase out for the period 01 October 2021 to 31 March 2022 and will continue to be exempt from interest limitation. It is proposed that the new legislation will be introduced in the next Omnibus Tax Bill, which is expected to be introduced by the end of August 2022.

Whilst the above may sound like a good idea, it is initially aimed at property developers. Property developers already get a deduction for interest. Whether or not developers will have an appetite to deal with tenants and enter the quasi property management market, the same outcome is achieved by renting the homes to a Social, Emergency or Transitional housing provider. With this option the developer and/ or any person holding a residential investment property does not need to deal with tenants and chase the monthly rent payments. The rent is paid directly by the social/ emergency housing provider like WINZ or Kainga Ora. As long as agreements are in place which provide for remedial works in relation to damages, this may be an alternative. This option is also available to a mum and dad who own one single rental property. There is no requirement to own a property portfolio consisting of numerous properties.

August 2022