Tide goes out on ‘struggle street’ investors
Law changes could create ‘real distortion’ in property investment. reports.
Property investor Tim owns a negatively geared rental. Each month, what he gets in rent does not cover the cost of the mortgage interest and repairs, rates and maintenance on the property.
At present, some of that pain is eased each year by the $2000 or $3000 tax refund the Auckland 28-year-old can claim.
The rental property’s loss reduces his total taxable income, and means the amount he has paid in tax on his salary works out to be too much, so he gets a refund. But that is set to change. ‘‘As part of a comprehensive response to the housing crisis, the Labour-led Government will remove the ability of speculators to offset losses from their property portfolio against their other sources of income in this term of office,’’ Revenue Minister Stuart Nash said.
‘‘We will be working with Inland Revenue officials to make sure that the system we will deliver is simple, fair, and best supports the housing market.’’
Tim, who does not want to be identified, said he would notice the difference. ‘‘But whose fault is it really, for buying overly-expensive property with low yields? I only have myself to blame.’’
He had thought about selling a Tauranga property that was making neither a profit nor a loss. ‘‘But I figured, with agents’ fees and then buying another property in the future, it was better to just hang on to them, use our wages to pay down the mortgages.’’
Accountant Mark Withers, who specialises in investment property, said the Government move would make an ‘‘enormous difference’’ to property investors. ‘‘The reality for most people is if they are debtfunding a property, certainly in Auckland, they are generally unable to charge rent that would cover their outgoings.’’
In every other industry sector investors could offset losses against their other income, but property investors could not. ‘‘The impact to investors is they lose their ability to save 33 per cent of that in tax. For a lot of investors, that will remove them from the market.’’
It would unfairly advantage people who had been investors for some time, he said.
Anyone with more than one property, where the others were making a profit, would still be able
‘‘The rich, wellcapitalised property investors will still be able to take advantage of the tax savings but the struggle street guys won’t.’’ Accountant Mark Withers
to offset losses against the other properties’ rental income.
‘‘But a person buying their first one is only able to offset that against their personal income and now they can’t. The rich, wellcapitalised property investors will still be able to take advantage of the tax savings but the struggle street guys won’t. It creates a real distortion.’’
He said the only way the Government could get around that would be to register losses on a property-by-property basis. At the moment, that is not the way tax on rental properties is filed.
Auckland Property Investors Association president Andrew Bruce agreed new investors were often negatively geared. ‘‘It tends to be a highly-geared sort of investment.’’
While investors can only borrow up to 60 per cent of the value of an investment property, ‘‘the other 40 per cent doesn’t tend to be sitting in the bank earning interest’’, he said. People would usually leverage off their homes.
‘‘It depends on where you are in your investing career. If you’re starting out it will be a lot harder to get in and those losses are going to bite quite a bit more. But the long-term view is over time you’d like to think you’d start to get to the point where you are more positively geared and make a profit on that.’’
He said it would stop people who owned a first house and wanted to load it with debt, rent it out and move on to another.
‘‘In reality they’re actually investing more for capital gain and not looking at the cashflow side.’’