New Zealand’s affection for investing in property, either commercial or residential, is not necessarily a straightforward investment decision, with its share of various tax implications to consider. Some of these factors may have a material impact now or in the future which you should consider as part of your due diligence process. This article provides a high-level overview of some of these tax implications.

General tax on investment income

Irrespective of whether you have invested in commercial or a residential property, all investment income earned will be taxable. With a few exceptions, expenses incurred which is directly attributable to earning this investment income can be treated as tax deductible. Such expenses include mortgage interest, insurance, repairs and maintenance, and property management fees. Accurate record keeping will be necessary to keep track of the above and to ensure you are filing the right information with the Inland Revenue Department.

Some tax specific matters in relation to a commercial or residential property investment is summarised below:

Commercial property considerations

Rental income from commercial property is subject to Goods and Services Tax (“GST”) where income from rental is more than $60,000 in a 12-month period. There will be a requirement to file regular GST returns and pay GST on all income received. Conversely, an input tax credit can be claimed on all GST applicable expenses.

From 1 April 2024, commercial buildings will be depreciated at 0% with no deduction available. This is slightly different to treating it as no longer depreciable as depreciation recovered on the disposal of the property will still apply if sold for more than its book value. Depreciation can still be claimed on any building fit-out which is recorded separately to commercial building in the financial statements.

Generally, the disposal of commercial property will not be subject to tax unless your initial intention when acquiring the property was to dispose of this property at a later date for a gain.

Residential property considerations

There are some differences between short-term and long-term residential investments.

• Short Term Residential Rental

The rise in popularity of the likes of Airbnb has made it easier for some residential property owners to rent out their holiday homes, for example, on a short-term basis. Caution needs to be exercised as short-term residential rentals, identified as stays of four weeks or less, is not considered exempt from GST. The short-term residential rental will be subject to GST if the annual short term residential income is over $60,000, if this property is owned by an entity/sole trader that is already GST registered, or if you voluntarily register for GST. There are also other GST implications to consider, like the possibility of paying GST on the value of the property should you decide to either sell the property or cease offering short-term residential rental.

In addition, if you are considering renting out your holiday home to earn a bit more money, there are specific mixed use asset rules to consider when apportioning the applicable expenses.

You will not be able to claim depreciation on the residential building.

• Long Term Residential Rental

Long term residential rentals are exempt from GST and therefore there is no need to file GST returns.

Irrespective of whether the residential property is used for either short term rental or long term rental, any taxable losses arising from residential investments will be ring fenced and cannot be offset against any other income. These tax losses will be carried forward and can only be offset against future taxable residential investment profits, if any.

Similarly, the disposal of any residential property will be subject to the brightline test rules. The brightline test is designed to tax any profits on the disposal of residential property held for a short period of time. Any property sold on or after 1 July 2024 will be subject to a two-year brightline period whilst any disposal prior to this date will be subject to a ten-year period.

Please get in touch with our tax team at Bellingham Wallace if you would like to know more about the tax implications applicable to you before investing in commercial or residential property.