Residential rental interest deductions and bright-line test updates

Residential rental interest deductions returning!

The Government has announced that it is to restore interest deductibility on residential rental properties from 1 April 2024. The rate of deduction for the year 1 April 2024 to 31 March 2025 will be 80% of the interest incurred on the properties.

Without this change, only 25% of that interest would have been deductible; none the year after. Instead, 100% of the interest will be deductible the year after (1 April 2025-hence).

The ability to deduct 80% interest next year will apply to all other residential rental properties, even those that were not able to deduct interest for loans drawn after 27 March 2021.

There was, initially, a promise to make the change retroactive to the current tax year 1 April 2023 to 31 March 2024, with 60% interest deductibility, but that has not proceeded. Instead, deductibility will remain as is, i.e. 50% on loans drawn before 27 March 2021, none for those after and 100% for new build properties (unchanged).

No decisions have been announced on the disposition of interest that has not been able to be deducted, whether the property is sold, changed, or held for the future. And reiterating, no changes have been made to full deductibility of interest for new build properties.

Bright-line test

A reminder of a previous Government announcement that from 1 July 2024 the bright-line test period will return to 2 years.  This will mean that from that date any house bought before 1 July 2022 and sold, will not be subject to income tax, unless you bought it with the intention of reselling, or you are caught by other provisions, such as being a builder or dealer in land. All properties bought since 1 July 2022 will also only be subject to the two year bright-line test period. All other exemptions from the bright-line test (i.e. main home exemption) remain unchanged.

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