"If the Government wished to take the serious step of ring-fencing residential property investment losses it would surely need to dish out the same treatment for all investment and trading losses," says Iain Blakeley, Tax Director at Ernst & Young.
Thursday, June 21st 2007, 6:00AM
by The Landlord
"If this feature of the tax system is really the reason for the remarkable increase in residential property investment, removing it for only one type of investment risks creating an equally undesirable incentive for taxpayers to flock to some other form of investment that doesn't have the same restrictions, he says. The cost of attacking one imbalance could be to create another.
The so called "advantage" of claiming rental losses against other tax appears to be the basis of a call for a special rule to apply, but the "advantage" is not unique to residential property investment.
"Any investor, whether in shares, artwork, vintage cars, businesses, commercial real estate or whatever, is able to borrow 100% of the cost of their investment as long as they can find a bank willing to lend the money. Usually it's a question of security and ability to make the repayments. It certainly isn't unknown for share investors to be able to borrow 100% of their investment cost.
"The point is, this funding ability is not a product of any tax rule and certainly is not unique to residential property investors.
"It seems illogical to argue special rules are needed.
"While it may be appropriate to scrutinise landlords' tax position because of the hot property market, let's not get caught up in a witch-hunt.
"When you look at it, the only real tax distinction between residential property investment and other forms of investment appears to be the temporary tax benefit landlords have from being able to claim deductions for depreciation.
If the value of the buildings has not depreciated at the same rate as the tax deductions claimed then there is an advantage for the landlord, but only until they sell the property. At that time the advantage is neutralised by the claw back rules.
"Changing the tax rules by limiting depreciation deductions or the ability to offset tax losses from residential property investment is unlikely to have a material impact on residential property values for the simple reason that those features of the tax system aren't really significant benefits at all and certainly aren't unique to residential real estate investment," Iain Blakeley says.
