Landlords: Homeowners have advantage
Property investors are warning there is not enough information to gauge what might happen when they are no longer able to claim their losses against other taxable income.
A law change is working through Parliament and is set to take effect from April 1, for the next tax year.
It will mean that investors who do not have enough rent coming in to cover the cost of owning a property will no longer be able to use that loss to reduce the tax they pay on their other income.
Inland Revenue said last week that 116,000 rental properties owners had declared a loss in the 2016-2017 tax year.
The average loss declared by each owner was $7138. That includes individual and nonindividual taxpayers, such as trusts, partnerships and companies.
The Government is concerned that being able to claim losses against tax gives landlords an unfair advantage and support in the property market.
‘‘Advice to the Government about the impact of loss ringfencing has proceeded without knowing how many private rental property owners are negatively geared,’’ said Mike Butler, spokesman for lobby group Stop the War on Tenancies.
‘‘A figure of 40 per cent was given in that advice without stating the total number of private rental property owners. The 116,000 number is much higher than I expected,’’ he said.
Many would decide not to continue if they could not claim losses and in an environment where the potential for capital gains was less.
‘‘Once an owner has to top up his or her rental with $138 every week from the day job with a greatly reduced chance of ever getting it back, it won’t be long before that owner decides to sell,’’ he said.
Andrew King, executive officer of the New Zealand Property Investors Federation, said it was difficult to know how many investors would opt to sell. Some who were making small losses might choose to try to put up their rents to cover costs, he said.
‘‘We just don’t know how many people will sell up . . . when the officials at Inland Revenue did their impact analysis they did say there was not enough information to know what would happen as a result,’’ he said.
‘‘To me, they should back off this. Their argument is that because rental property owners can claim a tax deduction, it means they have an unfair advantage over first-home buyers. That’s simply not true. They’re totally different entities.’’
He said his organisation had work done that showed that homeowners were getting the benefit of accommodation from their properties, which was worth the same amount as the income an investor would get from rent from the property.
Once expenses were deducted they were typically making a profit of $1500 a year.
‘‘They’re not paying any tax on it but the rental property owner is. It’s a uneven playing field the other way. It’s better for homeowners at the moment.’’
He said the policy had been drawn up without any idea of what the effect would be. ‘‘That seems extremely risky. The only thing it can do is push rents up or reduce supply. We just don’t know to what extent.’’
Economist Shamubeel Eaqub said the change would take away the incentive to ‘‘park money’’ in a rental property that did not make money, in the hope of capital gains. But he said the effect would only be felt at the margins.
‘‘The point is, if you want to do that, you don’t get that tax cover for taking that speculative risk. Why should the rest of New Zealand fund your speculative bid? Speculate as much as you want but do it with your own money.’’
Brad Olsen, an economist at Infometrics, said ring-fencing would affect small investors more than those with bigger portfolios. Investors will still be able to offset losses from one property against another. ‘‘It would be interesting to know, that if the government does introduce a capital gains tax, will they also reverse a loss ringfencing, given the capital gains tax would effectively capture the lost economic ‘income’.’’