Let’s talk about commercial property tax benefits 

Aside from the benefits of long-term capital growth, regular income and resiliency to cyclical market pressure, commercial property investment can also provide compelling tax advantages for investors taking a long-term view. 

In the current elevated interest rate environment, bank advertised returns on term deposits (or other cash investments) may appear higher than those of managed commercial property funds today – however, it is important to consider net returns, not gross, given the potential to pay less tax over time on commercial property investments. 

• Firstly, PIE fund structures (like those found across the Oyster portfolio) mean that only a portion of cash returns are taxable. Compare this to a term deposit, where 100% of returns are subject to tax.  
   

• Secondly, the PIE structure caps the tax rate at a maximum 28% on returns, which can provide potential tax advantages for those investors on higher income tax rates of 33% or 39%. 

• Thirdly, interest costs on commercial property ownership are tax deductible. In comparison, aside from new residential builds, interest deductibility has been removed for residential property acquired after March 2021 and deductions are to be phased out altogether by March 2025. 

There are long-term tax efficiencies too when it comes to capital gains – an important consideration given the long-term nature of property investment [and for those thinking about the generational transfer of wealth/investments]. 

• In New Zealand, capital gains realised on the sale of commercial property are generally non-taxable. This is a significant advantage over residential property, which is subject to the ‘bright line test’ and as of 1 July 2024, can be taxable if divested within 2 years, 
   

• Additionally, any tax losses on commercial property investment are not ring-fenced, so can be offset against other income.  Residential property tax losses can only be offset against other residential property income. 

The content of this newsletter is current as of 13 August 2024. It is not intended as financial advice. Please seek advice from a licenced financial advice provider before making any investment decisions.