Investor expects extra $45k tax bill
Property investor Graeme Fowler expects to pay an extra $45,000 a year in tax when new rules fully take effect.
The Government announced last month that it was introducing a range of changes designed to ‘‘tilt the balance’’ of the housing market towards first-home buyers, including an extension of the bright-line test to 10 years.
Another change removes investors’ ability to deduct loan interest as an expense. Until now, investors have been able to reduce the tax they pay on their rental income by offsetting that income against the interest charged on their home loans. There are likely to be exemptions from both changes for newly built properties.
Fowler, the author of 20 Rental Properties in One Year, and the owner of about 55 residential tenancies and 14 commercial, said the changes might affect his plans.
‘‘The one change that could potentially cost investors a lot of money is the removal of the interest claim. The Government calls this a ‘loophole’, which is highly misleading and not true,’’ he said. ‘‘It has never been a loophole and interest has always been claimable as it is with any other business loans and will still be with any commercial properties. They have singled out the interest claim on residential loans and then called it a loophole.’’
He said about 40 per cent of his debt was on residential property and the rest on commercial. ‘‘The residential portion of interest paid currently is $130,000 per year or just under $45,000 a year extra in tax when the new rule fully takes effect.
‘‘This will be phased in over the next four years assuming National doesn’t get voted back in next time around and changes it back to how it was . . .’’
He said his strategy had been to buy properties and pay them off as quickly as possible, and that would serve him well in the new environment. ‘‘If you have no debt on your rental properties, there will be no interest to pay. My goal has always been to eventually have no debt on any properties and by bringing in this new rule, I may accelerate this and sell off some properties to reduce or eliminate the residential debt.
‘‘The disadvantage of doing this earlier than planned is that I lose the leverage effect – of the debt being slowly paid down. That can easily be balanced out by selling some residential properties and buying more industrial/commercial properties. At this stage, that one seems to be the most likely choice. However, I will be waiting, weighing up all the various options, talking to my accountant more and choosing the best one that suits the strategy going forward.’’
Another investor, Steve Goodey, who said he had ‘‘lots’’ of tenancies, said his strategy could also change. ‘‘A little, but I’m not the average investor as some of my stuff is commercial. I’ll buy some new builds, raise rents and ride it out. Most investors with only one property will take the cash flow hit. It’s probably set their goals back four or so years.
‘‘First against the wall will be the last people who bought houses. ... it’s a massive attack on the middle class, the top end of property is unaffected. Commercial investors and landlords with no debt are laughing.’’
Rosie Collins, an economist at Sense Partners, said investors with large amounts of debt were the most likely to change their strategies in response to the changes.