Tax changes: how they’re changing architecture

The age of the knockdown and rebuild is here, with the introduction of a 10-year bright-line test on March 23. The new tax law means that profit on any property sold within 10 years of acquisition will be taxed, but the silver lining is that new builds are exempted.

The exemption was put in place to encourage the increase of housing supply, but it is also likely to have an effect on those who are tossing up between renovating and rebuilding.

With the cost of renovating often an unknown quantity, the tax change adds weight to the choice to simply start from scratch.

Exemptions on bank loan-to-value ratios for construction lending have already been in place for some time, with the aim of promoting new builds, and the latest tax changes support the trend for building new.

On top of these incentives, a $3.8 billion fund aimed at accelerating housing supply was also announced on March 23, which will allow spending on infrastructure and increase the availability of land on which to build new.

What do your clients need to know about the tax changes?

For clients tossing up whether to renovate or rebuild, there are a few things they’ll need to consider.

If they’re building a new bach, rental property or dwelling other than their main home, then a five-year bright-line rule applies. If they’re building a new primary residence then it is exempt from the bright-line rule.

• If they use less than 50% of their property as their residence (for example 60% of the area of the house is rented as a granny flat) then the main home exclusion does not apply.
• If they have a regular pattern of either buying and selling or building and selling the main home then they cannot use the main home exemption.
• Same goes if they have used the main home exclusion twice or more over the two-year period immediately before they sold their main home.
• If their main home was not used as their main home for any continuous period or periods of more than 12 months during the bright-line period, the main home exclusion will not apply to the period(s). They’ll pay tax on the portion of profit that relates to the period(s). This is the ‘change-of-use’ rule. (For periods of 12 months or less the ‘change-of-use’ rule does not apply.)

The advantages of building new

Not only are there lending and tax advantages for your clients who are building new, but there are other benefits too.

For rental properties, baches and homes, the improved rentability of new builds is well known, whether that is to short-term stays or to long-term tenants.

In much the same way, the saleability of new builds is far better than for older homes, so for anyone who needs to have flexibility in their property portfolio, new builds are the way to go.

The maintenance that is required for new builds is another major benefit. Not only is there unlikely to be any maintenance required in the first decade of home ownership, but the cost savings of doing negligible maintenance compared to an older home means there are tangible monetary advantages.

The changing face of New Zealand architecture

The raft of regulatory changes aimed at increasing housing supply over the past five or so years means there has been a major shift in New Zealanders’ thinking around building new.

Not so long ago, building new was for the mega-wealthy, but now architecturally designed homes are something that many homeowners consider, particularly as people want to design the life they want to live, rather than be dictated to or negotiate with the designs of the past.

We can see this change in our local landscape; in Auckland the Unitary Plan opened up the city to higher density living and new build infill housing; and in all the other main centres a move to increase housing supply means new builds are popping up, whether in city centres or in new subdivisions or towns.

Interestingly, in 2018, the number of building consents issued in Auckland was only equal to the average number being issued in the 1970s, when the population of the city was only 700,000.

But with the added impetus of the latest tax changes, we’re likely to continue to see those consent numbers rise and correspondingly, for the architectural landscape to represent something far more contemporary.

For clients tossing up whether to renovate or rebuild, there are a few things they’ll need to consider.

If they’re building a new bach, rental property or dwelling other than their main home, then a five-year bright-line rule applies. If they’re building a new primary residence then it is exempt from the bright-line rule.

• If they use less than 50% of their property as their residence (for example 60% of the area of the house is rented as a granny flat) then the main home exclusion does not apply.
• If they have a regular pattern of either buying and selling or building and selling the main home then they cannot use the main home exemption.
• Same goes if they have used the main home exclusion twice or more over the two-year period immediately before they sold their main home.
• If their main home was not used as their main home for any continuous period or periods of more than 12 months during the bright-line period, the main home exclusion will not apply to the period(s). They’ll pay tax on the portion of profit that relates to the period(s). This is the ‘change-of-use’ rule. (For periods of 12 months or less the ‘change-of-use’ rule does not apply.)

Not only are there lending and tax advantages for your clients who are building new, but there are other benefits too.

For rental properties, baches and homes, the improved rentability of new builds is well known, whether that is to short-term stays or to long-term tenants.

In much the same way, the saleability of new builds is far better than for older homes, so for anyone who needs to have flexibility in their property portfolio, new builds are the way to go.

The maintenance that is required for new builds is another major benefit. Not only is there unlikely to be any maintenance required in the first decade of home ownership, but the cost savings of doing negligible maintenance compared to an older home means there are tangible monetary advantages.

The raft of regulatory changes aimed at increasing housing supply over the past five or so years means there has been a major shift in New Zealanders’ thinking around building new.

Not so long ago, building new was for the mega-wealthy, but now architecturally designed homes are something that many homeowners consider, particularly as people want to design the life they want to live, rather than be dictated to or negotiate with the designs of the past.

We can see this change in our local landscape; in Auckland the Unitary Plan opened up the city to higher density living and new build infill housing; and in all the other main centres a move to increase housing supply means new builds are popping up, whether in city centres or in new subdivisions or towns.

Interestingly, in 2018, the number of building consents issued in Auckland was only equal to the average number being issued in the 1970s, when the population of the city was only 700,000.

But with the added impetus of the latest tax changes, we’re likely to continue to see those consent numbers rise and correspondingly, for the architectural landscape to represent something far more contemporary.