Landlord bosses have expressed shock and dismay at today's Government announcement to axe interest deductions on rental properties.

Andrew King, NZ Property Investors Federation president, and Sharon Cullwick, federation executive officer, were both taken aback by the Government decision to eliminate interest rate tax deductions, which investors can currently claim on properties.

"What, so every other business in New Zealand can still claim tax deductions, but not landlords?" King asked. "You're joking! This is just bizarre, it's crazy."

The sums involved could be tens of millions of dollars, King said, and that would now be lost to landlords, already struggling under Residential Tenancies Act changes from last month which swung the power in tenants' favour.

Landlords now deduct interest on loans for rental properties, claimed as an expense that reduces the amount of tax they pay.

Cullwick said she was also surprised at an end to mortgage interest tax deductions and was in a briefing with Inland Revenue this morning.

The Government will now stop landlords claiming interest on loans for rental properties as an expense against their income from those properties and other forms of income such as wage and salary earnings.

King said: "We all know one of the major downsides for investors in property is that the rent doesn't cover the costs of running many places. In New Zealand, it's cheaper to rent than to buy a house.

"This change will make it almost impossible for people to provide new rental accommodation. This means the only people able to buy rental properties in the future will be those with almost all the cash to pay for the property."

Asked why this would be such a big problem when mortgage interest rates are at all-time lows, King said: "Paying the interest on mortgages for landlords is a huge issue.

"When you've just bought a rental property, the cost of the mortgage is the biggest single cost for an investor. This will add a huge amount to the cost of providing rental property. Investors will have to have the cash to buy the house in full - well not quite, but it just makes it so much harder, virtually impossible."

Peter Lewis, Auckland Property Investors Association vice-president, said of axing interest payments on rental property mortgages: "That's fairly drastic. Philosophically this is wrong because it has been a long-standing business practice that any costs in running a business can be claimed as a tax education. We do have it in writing from the Ministry of Business, Innovation and Employment that owning a rental property is a business.

"This will penalise people who have recently got into the sector or those who are about to over and above those who have been long-term landlords, got their borrowings down to a low level and have fewer costs on mortgages.

"To me, the whole ethos is wrong. If you eradicated all landlords, you wouldn't create one extra house in New Zealand which means the housing situation would not be eased."

The Government will consult on the detail of these proposals and legislation will be introduced shortly.

"Consultation will cover an exemption for new builds acquired as a residential investment property, and whether all people who are taxed on the sale of a property [for example under the bright-line tests] should be able to deduct their interest expense at the time of the sale," today's announcement said.

New law timeline

The new law will come in from October 1.

Interest deductions on rental properties bought on or after March 27 will not be allowed from October 1, today's announcement said.

Interest on loans for properties bought before March 27 can still be claimed as an expense.

But the amount landlords can claim will be reduced over the next four income years until it is phased out.

This means that in the 2025–2026 and later income years, landlords will not be able to
claim any interest expense as deductions against their income.

If money is borrowed on or after March 27 to maintain or improve the property bought before March 27, it will be treated the same as a loan for a property acquired on or after then.

King was not as surprised by the bright-line test being pushed out to 10 years as an anti-flipping measure: "Some people wanted it to be 30 years!"

But he said this move also reflected the fact that people did not understand the difference between investors and flippers, saying the former was a long-term holder of property whereas the latter aimed to make a quick profit in a short time.

Landlords were in the former category, King stressed.