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The abolition of tax deductions for interest costs on rental properties is savage and will have a negative impact on the rental market, property investors say.

The government announced a series of policy measures to address the housing crisis on Tuesday, and those measures included some directly aimed at limiting investor activity.

One measure was an extension of the bright line test, which requires investors to pay a tax on their capital gains when selling a property, in 10 years.

Another was the removal of the ability of investors to reclaim the interest cost of a home loan against the rent received on the property.

These changes were scheduled to happen immediately, with any investment property going unconditionally after Saturday set to be hit by the new rules.

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The announcement left investors feeling shocked but angry and convinced that the Government was confused about the difference between investors and speculators.

New Zealand Property Investors Federation president Sharon Cullwick said most investors were buying for a long time, while speculators were paying taxes anyway.

Changes in interest rate deductions on rental properties will have a negative impact on the market, says Federation of Property Investors president Sharon Cullwick.

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Changes in interest rate deductions on rental properties will have a negative impact on the market, says Federation of Property Investors president Sharon Cullwick.

Increasing the bright-line proof will do nothing to stop property speculation, but removing the interest discount is huge and will increase the cost of securing rental properties drastically, Cullwick said.

Every investor who directs his investments as a business will have to look at finances, she said.

Without the ability to claim legitimate costs of mortgage interest costs, we estimate that the cost of securing a $ 600,000 rental property will increase by about $ 6,000 per year. If interest rates were to rise, that would rise.

Cullwick said that, by 2025, when discount rules were fully introduced, she did not think there would be enough homes to be built and that would bring squeeze into the market.

The demand side measures announced today will reduce the supply of rental properties and raise rental prices.

Tenants need more rental properties, she said.

Owners of private rental properties are not the problem. They are part of the solution to the problem.

Matthew Gilligan, managing director of accounting firm Gilligan Rowe & Associated said the bright line test changes were a capital gains tax from stealth, but the tax deduction for interest was wild.

Accountant Matthew Gilligan says every business in the world operates with interest rate deductions.

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Accountant Matthew Gilligan says every business in the world operates with interest rate deductions.

The firm has 10,000 investors as clients.

He said the labeling of governments of all investors as speculators was inconvenient because there were many legitimate long-term investors living off the income on their rental properties and paying taxes on them.

Investors are currently paying two-thirds of the interest, with one-third discounted. Not being able to claim a third means they will pay 50 percent more. This will really hurt middle New Zealand.

Moreover, the government labeling the interest deduction as a gap was absurd as interest was a common cost to do business and every business in the world operates with interest tax deductions, Gilligan said.

The move will take away the shine from the investment property and the broken supply. The government is playing with fire. This is ideology, not good tax policy.

Wellington developer Ian Cassels and investors David Whitburn and Andrew Bruce from Auckland said they are not worried about the extension of the bright line test.

Bruce, who until recently was president of the Auckland Property Investors Association, said it was a significant change, but the biggest impact would be on younger, smaller investors as well as those already struggling with cash flow.

Potentially, the changes could have a significant impact on the banking service criteria for investors and this could have some serious implications in terms of supply.

I find it very strange that when you have a supply problem you would introduce a policy that has the potential to create more of a supply problem, he said.

Since the interest rate changes seemed to apply only to residential properties, commercial property was likely to become more attractive to investors, he said.

The interest rate changes will lead to greater caution in investing in rental properties, says the Wendy Alexander Real Estate Institute.

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The interest rate changes will lead to greater caution in investing in rental properties, says the Wendy Alexander Real Estate Institute.

I am looking to sell some of my residential properties and move into commercial space now. This is because of all the policies that now exist around housing and the growing difficulties in managing troubled tenants.

Acting chief executive of the Real Estate Institute Wendy Alexander said interest deductions would completely change the financial dynamics of investing in residential properties.

In our view, people are likely to already be cautious about investing in rental property, given recent changes to the tenancy law and the preliminary removal of the ring fence, Alexander said.

However, this is likely to exacerbate concerns about investing in rental property and may see investors considering whether they can get better returns elsewhere.

Many landlords were likely to increase their rent over the next few years as they sought to offset costs, she said. In this way, making rents even more unaffordable and making it even more difficult for tenants to save a deposit on their property.

Extending the bright line test would not be a magic bullet in terms of resolving housing issues in New Zealand, nor would it do anything to increase home supply, Alexander added.

In fact, what is likely to lead is residential property investors holding on to their properties even longer in order to avoid paying tax, thus further reducing the total properties available in the market.

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