are holding costs (e.g. interest and rates) tax deductible - IRD say no!

Last month IRD issued a consultation document on the tax treatment of holding costs where private land was taxed on sale.

This issue has arisen mainly due to the introduction of the Bright-Line tests, meaning land sold within five years of purchase is taxable. The Bright-Line test brings into the tax net land which will often have been used privately e.g. holiday homes, where there would have been an historic expectation that the holding costs, for example rates, insurance, interest, repairs and maintenance would have all been non-deductible as private expenditure. This approach made sense when any gain on the property was regarded as a tax-free gain effectively meaning the whole property sat outside the tax net. 

IRD's initial view is that despite the gain now being taxable that the holding costs still represent the private use of the land and should remain non-deductible. This is likely to come as quite a surprise to someone who is being taxed on the gain on their holiday home who over the holding period will have incurred significant expenditure to allow them to keep that asset (while it increased in value).

Submission closed on this document last week and it is fair to say that not everyone agrees with the IRD's suggested approach. The Bright-Line test has changed the way we view land and we believe it should also change the way we view holding costs even when the land was used privately.

If you are facing a tax bill under the Bright-Line test then this issue will be important to you and you should seek professional input.