The Government finally released information on its policy around interest deductibility with an exemption to social housing tenanted properties. We look at the potential issues with such a decision.

If you are a property investor, you are now likely to be impacted by the Government’s new policy that limits the ability to deduct interest against rental income. The highly controversial policy was announced back in March this year, yet we have had to wait until now to see what this WILL look like.

In early November, in conjunction with Pocock Tong Trass Chartered Accountants, we will be hosting a special webinar explaining what all the changes are and how they will impact you. However, for the purpose of this article, we want to focus on one of those announcements that could lead to an increase in housing becoming available for social housing providers.

The Social Housing Register has increased rapidly over the last five years resulting in a major issue for the Government. In June 2016, there were only 3,876 people on the social housing register. In just five years, this has ballooned to 24,474. As rents and house prices have increased, the waitlist has also ballooned in size. The need for social housing is apparent and obvious.

During the announcement about the new policy, we were surprised to find out that property used for emergency, transition, social or council housing will be exempt from the interest deductibility rule meaning that you will still be able to offset interest against income. This is significant because landlords may be paying as much as an extra
$50 to $100 per week in tax as the phasing out of interest deductions takes effect. As of April 2025, you will not be able to claim any interest on a standard residential rental property that isn’t a new build.

What this means is that investors may decide to lease their investment property to the likes of Kainga Ora or agencies such as Link People who will then use the property for transitional or social housing. There are obvious risks associated with transitional housing. However, those risks can be offset with agencies agreeing to reinstate the property to its original condition (minus fair wear and tear) and guaranteeing market rent. The state is not going to default on rent payments. When you work out the maths, if a landlord is going to save themselves anywhere in the region of $5,000 in tax per year, the risks look more and more appealing.

The question we are asking ourselves is whether we will see savvy investors turn to older stock that will no longer appeal to the new generation of investors who have their mindset on new builds. You may find yourselves competing with fewer buyers and if successful, you can then simply rent out the property to a social housing provider. The state pays your rent whilst you offset the interest reducing your tax bill.

Doing this, however, could lead to issues in neighbouring properties if the occupant of a social house is not someone who is focused on positive relationships within the community. We do not want to stereotype the occupants of transitional housing, but the reality is there will be a higher percentage of risk of having a potential antisocial and problematic occupant who causes issues within the community.

This can become a dilemma for a property management company if an owner instructs the property manager to lease the property to a provider of social housing. You have no control over who goes into the property and in some cases this will lead to issues in the communities that we look to build.

Does a property manager refuse and risk losing the business or do they accept and try to work proactively with the provider to ensure that the community is not being exposed to unnecessary risk and antisocial behaviour? There may also be issues with unit title developments and in strata management blocks. Putting the wrong occupant in an apartment block could have dire consequences for the occupants and owners of neighbouring apartments.

The new policy changes could be another Government decision that has unforeseen consequences that negatively affects our communities but on the flip side, everyone deserves the right to have a roof over their heads and a warm, safe and dry home.

We will watch this space carefully and if you have any questions about our service, please contact us at Tommy’s Property Management.

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