Tax incentives to boost long-term rental supply

  • Hon Dr Megan Woods

· Tax changes aimed at growing quality, secure rental supply

· New and existing build-to-rent developments exempt from interest limitation rules in perpetuity, when offering ten-year tenancies

· Exemption to apply from 1 October 2021.

The Government is encouraging more long-term rental options by giving developers tax incentives for as long as the homes are held as long-term rentals, the Housing Minister Megan Woods has announced.

“We’re providing an exemption from the interest limitation rules to certain types of new and existing build-to-rent developments in perpetuity,” Megan Woods said.

“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. Tenants will be able to break their tenancy agreements at any time, with 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.

“We recognise the big role the build-to-rent sector can play in filling a gap in the general rental market by increasing the supply, density, and diversity of housing.

“Aotearoa New Zealand needs to build more houses where they are needed and at prices that low- to moderate-income households can afford. 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,” Megan Woods said.

The move is being welcomed by Property Council New Zealand.

“Today’s announcement is one of the best levers to unlocking the potential of Build to Rent,” says Property Council New Zealand Chief Executive Leonie Freeman.

“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,” Leonie Freeman said.

Legislation to make the changes is expected to be introduced to Parliament at the end of August.

Notes to Editors:

· Build-to-rent is a commercial and professional product designed to provide high-quality medium-to-high density rental housing in centrally located areas.

· It is a model increasingly common in overseas housing markets and is different to much of Aotearoa’s current private rental offerings (which tend to be smaller one landlord, one tenant arrangements).

· The Government will introduce the following build-to-rent asset class definition:

o tenants must be offered a fixed-term tenancy of at least 10 years with the ability to give 56 days’ notice of termination, but they may agree to or request other tenancy offers. Note that in order to qualify as build-to-rent, a tenant does not have to accept a 10-year tenancy offer. A build-to-rent development will satisfy this requirement as long as a 10-year tenancy term is offered.

o at least 20 dwellings in one or more buildings that comprise a single development, on either a single parcel of land or multiple contiguous parcels

o the dwellings and any common land or facilities for those dwellings have a single owner

o dwellings can be held in one or more titles

o the building that a build-to-rent dwelling is in can include other dwellings or commercial premises that do not form part of the build-to-rent development (for example, an apartment block that has shops on the ground floor)

o the dwellings are used or available for rent under the Residential Tenancies Act 1986

o explicit personalisation policies must be offered, over and above the Residential Tenancies Act 1986

· For existing build-to-rent assets, interest will not be phased out. Taxpayers who hold existing build-to-rent assets will not be subject to the interest limitation rules for the short period of 1 October 2021 to 31 March 2022, and will continue to be exempt in perpetuity.

· 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(s) can deduct interest for as long as the asset is held and operated as a build-to-rent development.

· It is unclear whether existing build-to-rent developments currently satisfy the requirements (e.g., the 10-year minimum tenure requirement). For existing build-to-rent developments, there will be a transition period allowing them to satisfy the requirements.

· The legislation for the proposal will be included in the next omnibus tax bill, which is expected to be introduced by the end of August. The public, including build-to-rent stakeholders will have an opportunity to provide formal feedback on the proposal at the select committee stage.

· The Build-to-Rent initiative builds on the Government’s programme to address the housing crisis such as:

o Major investment in rebuilding the public housing sector (10,000 additional homes and counting)

o Investment in Māori housing to deliver up to 1000 new homes, repairs and maintenance to 700 homes, and infrastructure support to enable for 2,700 home sites ($730 million Budget 2021)

o $3.8 billion for critical housing infrastructure like pipes and roads to enable new housing

o Cutting red tape for urban development to encourage more new housing in areas where people want to live

o Support for first home buyers; affordable homes, grants and loans and Progressive Home Ownership

o Affordable Housing Fund to support new developments

o Building Consent System review to unlock productivity and more affordable homes

o Commerce Commission market study to pave way for fairer deal on key residential building supplies

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