Tax-break loss could hit tenants: IRD

Rents could rise when landlords can no longer get a tax break on loss-making rentals, officials say.

The bill that introduces ringfencing of tax losses for rental properties is likely to get its first reading today.

At the moment, investors can use losses on rental property – if the rent earned does not cover costs – to reduce the tax they pay on their other income.

Inland Revenue’s regulatory impact statement for the bill said about 40 per cent of landlords had rental losses in any one year, with an average tax benefit of $2000 a year.

The Government says that gives them an unfair advantage over first-home buyers who do not have that tax benefit.

The bill would change that so that those losses could only be applied to future income from that property, or other investment properties owned by the same investor.

Inland Revenue said ringfencing was likely to increase the tax paid by landlords by $190 million year. It was not clear what the market impact would be.

‘‘Rental loss ring-fencing will reduce after-tax rental returns for some landlords. This could encourage the transfer of housing stock from investment housing to owner-occupier housing, putting pressure on the remaining rental stock,’’ the tax department said.

‘‘On average, owner-occupied housing tends to have fewer people per house. This suggests that the transfer of housing stock from rental to owner-occupied may reduce the amount of housing available for each remaining renter unless there is an adequate flow of new housing onto the rental market.

‘‘This may lead to increased rents. Landlords may also pass on their rental losses to tenants in the form of increased rents.’’

Property investor David Whitburn said he expected rents would rise but that would be constrained by what tenants could afford to pay.

He said the impact would be felt less keenly now than in years past because loan-to-value restrictions had required new landlords to have bigger deposits, which reduced their loan costs.

Mike Butler, of lobby group Stop the War on Tenancies, said some property investors would have to sell.

‘‘If losses would carry forward and could be offset against future rental profits, it looks like the Government is shifting a claimed problem rather than solving it, if in fact it is an actual problem.’’