Invest? Speculate? Check your goal
RISING house prices, historically low interest rates and banks’ eagerness to lend make investing in property a tempting proposition on the back of a housing shortage.
“In July last year we spoke of the impending housing shortage crisis and predicted there was ‘no way developers in New Zealand, combined with those thinking of selling could provide the level of housing now needed,’” Harcourts group chief executive Hayden Duncan says.
“This complication of very few listings and continual buyer activity does create upward pressure on housing prices.”
These factors, along with global economic uncertainty, a loss of confidence in finance companies, and largely untaxed capital gains, provide ample incentive in property (which also is an easy asset to leverage).
While it’s not without complications – dealing with tenants, keeping on top of maintenance – the last few years have shown property investment in New Zealand to be more resilient to external economic shocks.
But those keen to become landlords or cash in on capital gain should invest time in research first, advises Harcourts’ Property Management Services.
It recommends investors identify their goals and vulnerabilities.
For instance, are they buying for capital gain or cash flow? If it’s cash flow, buy in areas with lower house prices and a higher renting population; if capital growth, look for locations where there are more owner-occupiers.
Investors should familiarise themselves with the local property market by consulting real estate agents and attending open homes and auctions (even if they are not buying).
They should also talk to property managers about rents and other tenancy issues.
Investors also need to consider if they want to realise immediate rental yield or would they rather add value to a property? Have they enough equity or debtservicing capability?
“Invest in time with your bank manager,” Harcourts says.
“Banks are certainly competing for your business but building a relationship with your bank manager and providing prompt, accurate information when they need it, helps them work better for you.
“Look for ways to pay down debt and quickly. Review your loans and structure regularly. Income/ liabilities and situations are always changing all the time
“Ensure the way you structure your loans aligns with your goal. Be careful to not have too much cross-securitised.
“Talk to your accountant about the structure that will suit you best.”
Property investor is a collective term for property speculators, dealers and investors but each is treated differently under tax law.
Which category investors come under depends on their intention when buying a property, the patterns of their previous property transactions and their associations to a builder, property dealer or developer.
According to the Inland Revenue Department: “If you’re an investor you buy a property to use it to generate ongoing rental income and not with any firm intent of re-sale.
“The property is a capital asset and any later profit or loss from selling the property is capital and isn’t taxable (apart from clawing back any depreciation, which is now recoverable).
“The rules may be different if you’ve been associated with a person or entity involved in the business of building, dealing, developing or sub-dividing land.
“If you buy a property intending to resell it, or you intend to sell it after making improvements to it, you’re likely to be a speculator or a dealer.
“Renting your property temporarily doesn’t change your tax treatment either – you’re still a speculator or a dealer.”
Property investors sometimes refer to a “buy and hold” strategy.
“This approach is most likely to mean you are a property investor for tax purposes,” IRD says.
“Investors will investigate and analyse future revenue streams, and any gain made on the sale of the property is incidental.
“Their investment is soundly based on a return from the rental income.
“Investors pay income tax on their net rental income but generally not on the eventual sale proceeds of the property.”
A speculator is someone who buys a property to re-sell it, as if it was a trading stock.
“Whether you live in it or rent it out, you’re speculating in property and your profit is likely to be taxable,” IRD says. “And, if you sell that property at a loss, the loss may be tax-deductible . . .
“To be a speculator, you need buy only one property with the firm intent of resale.”
The IRD defines a dealer as being similar to a speculator but with an established pattern of buying and selling properties.
“Some property buyers refer to a ‘buy and flick’ strategy. This approach is most likely to mean you are a property speculator or dealer for tax purposes.”
The IRD’s property investor definitions don’t set time limits or number of properties sold.
“If you buy a property with the firm intention of re-sale, it doesn’t matter how long you hold it – the gain on resale will be taxable (and any loss may be tax-deductible).
“There is no set number of properties you can have before they become taxable.
‘‘In some cases, the first property bought and sold may be taxable if you bought it for re-sale.
“In other cases there could be a number of factors to take into consideration, such as having a regular pattern of buying and selling property, before a property is taxable.
“The factors that may be looked at will vary because each taxpayer’s circumstances are different.
“For example, buying one property every two years may be considered a regular pattern for one individual and not another.”