Labour’s property laws have landed, and they’ve lit a fire under investors around the country. But what does this mean for the future of property investment? While things have certainly changed, don’t worry – there’s still a clear path forward.

But before I go into detail, let’s outline exactly what these property laws mean. There are two major measures to take note of – changes to the bright-line test and an end to interest deductibility.

What is the bright-line test?

The bright-line test was introduced by the National party to deter property flipping. Essentially, if you sell an investment property within five years of buying it, you’ll have to pay income tax on the profits.

With the new property laws, the bright-line test has been extended to ten years.

Anyone selling their investment property within this time period will have realised capital gains taxed by their top marginal tax rate, which in most cases will be 33% or 39% (depending on the seller’s income and the total capital gain).

What about interest deductibility?

The other significant measure introduced is the removal of interest deductibility from investment properties.

This will be phased out over the next few years, with 75% still claimable after October 1 this year. It then drops to 50% in 2023, 25% in 2024 – before finally ending all together in April 2025.

What will this mean for rental properties? We’ll see. A lot of rental property owners aren’t happy, though. They particularly dislike the phrase ‘loophole’, which the Government has been using to describe interest deductibility, and (rightly) claim that every other business is able to deduct interest on business loans.

There’s a chance that owners will offset these new costs by increasing rent – which could make these laws unfavourable for landlords and renters alike. Unless, of course, market supply keeps the price steady. But we’d need to see a lot more new properties built by 2025 for this to happen.

Why have these measures been introduced?

The Government aims to give first-home buyers more room to move by making existing properties less attractive to property speculators. They hope that with the extended bright-line test and the removal of interest deductibility, investors will turn their attention to new properties, which – and this is important – are exempt from both new measures.

Where does this leave property investors?

As I mentioned in the beginning there is still a clear path forward for investors who want to get around the laws – new builds. 

While the bright-line test still exists, for new builds, the usual five year limit remains in place. As for interest deductibility – at this stage, new builds are completely unaffected.

This makes new builds a very attractive investment option.

New Zealand has a property shortage, that’s why prices have skyrocketed, and why Labour has introduced these new laws. Now, I’ve always advocated for new builds as excellent investment options. In fact, I’ve listed a few good reasons why here. And this is just another factor in favour of investing in new properties.

These laws are a big change – and a shock to many. But don’t worry, all you need to remember is this: moving forwards, existing properties will come with an extra tax burden while new builds will offer investors a bit more flexibility. There are still plenty of opportunities in New Zealand’s property market, and with a good strategy, plenty of money to be made.