Owners of both commercial buildings and rental houses will no longer be able to claim depreciation on their investments.
The Budget released today also removes a 20 per cent depreciation loading on new plant and equipment purchased after Budget day.
The two depreciation measures were suggested in the Tax Working Group report and the subject of speculation going into the Budget.
They together boost the Government accounts by about $1 billion a year and are among the big items not disclosed before the Budget's release.
The move to deny depreciation deductions for buildings, such as rental housing and office buildings with a useful life of 50 years or more, takes effect from April 1, 2011.
Finance Minister Bill English and Revenue Minister Peter Dunne said the moves would help rebalance the economy toward productive investment.
"This will reduce the incentive for people to buy rental property purely for tax reasons," Mr English said.
He said depreciation rates were high and it made no sense to allow depreciation on buildings which appreciate in value.
Mr English expected the changes to have only a mild impact on rents. Treasury estimated they could rise by 1.5 per cent over three to four years because of the changes.
"We will have to wait and see how the property market reacts," he said.
The budget also changes rules for so-called qualifying companies (QC) and loss-attributing qualifying companies (LAQC) from April 2011, so that both profits and losses flow through from them.
"Changes to LAQCs and QCs to make them flow-through entities for tax purposes will reduce the opportunities for tax structuring," Mr English said.
The changes to depreciation rules will hurt listed property trusts. Ahead of the Budget ING Property Trust said uncertainty about tax policy on property was affecting the value of its property portfolio. Mr English said the uncertainty was now removed.
The Budget also prevents property investors from using rental losses to inflate Working for Families from April 1, 2011.