The latest reforms aimed at calming the housing market included the elimination of the tax break that permitted interest costs to be deducted from wages.
According to KPMG tax partner John Cantin, tax code looked at how money was spent, and in the case of residential investment properties, it had a dual-use, both for rental income and holding the land for capital gain.
“The current rules before the change said all of the rental use is what we focus on and therefore the interest is all deductible, but when you look at how that property is being used quite clearly it’s being held and some time in the future it might be sold,” he said.
“There’s a dual-use, so the problem that I think the government has looked at is how do you deal with that dual-use.”
Cantin said the new policy assumed the property had been bought for the capital gains only – which was generally not taxable.
“Unfortunately I think their use of the loophole language has obscured that sort of policy thinking.”
Instead of wiping the tax break altogether, Cantin recommended the government consider allowing 50 percent deductibility, which would more fairly account for the dual-use.
“The 100 percent non-deductibility isn’t on the table for consultation as generally tax policy would be,” Cantin said.
“What is on the table [are] things like how does it apply to new builds, what happens if you sell the property and the game is taxable because you’re caught by the bright lines here so the next level of detail is what’s being consulted on not the policy itself.”
What is changing
When owners of residential investment property calculate their taxable income they can deduct the interest on loans that relate to the income from those properties (claimed as an expense). This reduces the tax they need to pay.
The government will negotiate on the amendments, but interest deductions on residential investment property purchased on or after March 27, 2021 will be prohibited beginning October 1, 2021.
Interest on debt on homes purchased until March 27, 2021 will also be deducted as a cost, although the sum you will deduct would be limited over the following four income years before it is entirely phased out.
This means that in 2025-26 and subsequent tax years, you will not be able to exclude any interest expenses from your taxes.
This move would have little effect on property owners (who pay tax on the selling of property). They will also be able to deduct interest as a cost.