12 Aug 2022

Tax break for investors providing long-term rentals

2:50 pm on 12 August 2022

The government is giving long-term build-to-rent developments a tax break in a bid to increase secure rental supply for tenants for at least 10 years.

Minister of Housing Megan Woods

Housing Minister Megan Woods says long-term rentals will help tenants build and maintain connection to their community. Photo: VNP / Daniela Maoate-Cox

Housing Minister Megan Woods today announced that certain types of new and existing build-to-rent developments would be exempt from interest limitation rules in perpetuity.

Legislation for the proposal is expected to be introduced to Parliament at the end of August.

"To qualify, developments need to offer tenants leases of at least 10 years. Tenants can ask for shorter agreements if they wish and the development will still qualify for the exemption," she said.

Tenants can break the tenancy agreement at any time by giving a 56-day notice period.

"We believe security of tenure is critical for people who are renting. This requirement will enable people to settle and personalise their homes, reduce how often they must find a new place to live and all those associated moving costs, especially as people face cost of living challenges, and help them to build and maintain connection to their community.

"We exempt new builds from the interest limitation rules for a period of 20 years to help steer investors away from the limited pool of existing properties and towards new housing supply to get Aotearoa New Zealand out of a housing crisis that was decades in the making."

Interest will not be phased out for existing build-to-rent assets.

Taxpayers who hold existing build-to-rent assets will not be subject to the interest limitation rules from 1 October 2021 to 31 March 2022.

For new build-to-rent assets, initial investors will be able to deduct interest for as long as they hold an asset and operate it as a build-to-rent development. Any subsequent investor can deduct interest for as long as the asset is held and operated as a build-to-rent development.

Woods said the build-to-rent sector would help bring in more houses that were affordable for low to moderate-income households.

"Build-to-rent can help to continue the current momentum of new supply and improve the quality of rental housing with new warm, dry, secure homes."

While it is unknown how many or if any existing build-to-rent developments currently meet the minimum 10-year tenancy requirement, there will be a transition period allowing them to fulfil them.

Woods told Checkpoint: "All of the developers I have talked to ... don't have a problem with offering tenancies up to 10 years. These are assets that will stay as rental properties for a very long period of time and they're wanting to see their tenants to put down those long-term roots...

"These are properties that are only qualified for the tax exemption if they are long-term rentals."

Asked if there would be any protections for tenants from rent increases, Woods said "the decision we made was that wouldn't work for a number of reasons".

Property Council New Zealand chief executive Leonie Freeman said the tax break was "one of the best levers" in the build-to-rent scheme.

"We support the government's desire to enable build-to-rent in order to provide warm, dry rental homes that offer Kiwis long-term security of tenure."

Freeman said the announcement could result in 25,000 new homes being built over the next 10 years.

She said the move would level the playing field between commercial, retail and residential property investments.

"This will ensure there is a lot more interest from the larger organisations to invest in this sector.

The new policy could also attract investors to social housing developments, Freeman said.

Renters United president Geordie Rogers hoped it would result in more long-term rentals being built, but has reservations.

The policy was essentially incentivising landlords to behave better towards tenants via a handout, Rogers said.

All tenants deserve long term leases and to have the protections in place for them already more rigourously enforced, he said.

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