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Property investment rules to change - forever

Friday, January 29th 2010, 11:33AM 11 Comments

by Philip Macalister

The talk about changes to the tax system has died down a little and now reality is starting to sink in.

Most commentary has been around the fact that the proposed changes are designed to whack residential property investors. The anti-property brigade has been in strong voice once again pushing the spurious line all property investors are fat cats rorting the system; thankfully investors have been putting up a pretty good defence.


While things are still murky around what the government will do and how far it is prepared to go to alienate a good chunk of its support base, there is acceptance change will happen.

As I have digested the changes and talked to other investors it has become clear this is big.

Indeed I would argue the changes are once-in-a-generation stuff. The rules around residential property investing will totally change. The business will be totally different and investors will have to change their approach.

I have heard that many investors have got the heebie geebies and are already looking to exit and have put properties on the market.

I’m not sure that is necessary. The changes don’t necessarily mean that investing in residential property will no longer be profitable. It means you will need to think about how you approach it.

One change I suggest will happen is that some of these companies who find properties for investors and sell them to them on the basis of depreciation gains and tax benefits will struggle to survive.

Also the changes are likely to drive up rents over the medium term. While that is a plus for investors, tenants won’t be happy with the government.

The March issue of NZ Property Investor will be giving you lots more information about what these changes mean and what you can do adjust.

I’d love to hear your thoughts on the changes and how you plan to adjust to them. You can comment below or send an email to thelandlord@landlords.co.nz

PS: I was in Auckland this week and attended one of Kieran Trass’s breakfast presentations. He has plenty of views on the changes and also some ideas on what to do. If you are in Auckland and want to attend one of these Wednesday sessions click here.
« Would the Nats really whack property investors?Two tax changes property investors could live with »

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Comments from our readers

On 29 January 2010 at 5:51 pm Barry Farrell said:
Not currently a landlord, but have been on several occasions in the past.
Landlords would have greater sympathy from the public overall if they were to take greater pride in their properties being offered for rent.
A family member was shocked by the lack of presentation, cleanliness and inefficiency of the fittings in properties he/she was offered.
It is time that landlords improved their performance significantly and endeavoured to reach a standard where it is a pleasure to take occupation of the properties.
On 30 January 2010 at 1:11 am Heather said:
I am a landlord and take great pride in the homes we have for rent. Always fix any maintenance issues immediately and have an annual improvements programme for each property that systematically upgrades fittings, furnishings, paint etc. We provide quality accommodation for a fair price and just get by financially in the short term, knowing that it will pay off in the future. The sacrifice will then have been worth it.

I too want to see the NZ fiscal position improve but it would be disappointing if a knee jerk reaction to dampen the efforts of small time residential investors ended up costing us all a lot more.
Rents could rise, + potential shortage of rental properties on the market (less people can afford to buy investment properties any more) = government must step in to provide more housing and tax payers will end up paying for that.
To have a higher proportion of the nations families in govt assisted housing is surely not a good thing.
On 30 January 2010 at 12:45 pm Rod said:
I agree with Heather.
Having spent the last 12 years selling new homes to investors and managing them on their behalf I can see a problem looming for our government if they pursue the changes they are reviewing.
Many of my clients will be forced to sell their new (Less than 10yrs old) brick and tile investment properties if the government changes the tax rules in regard to depreciation. They purchased these properties to hold long term with the intent that they would eventually supply them with inflation proof income as recommended by the governments retirement website www.sorted.org. - which states that unless one has other income sources than the expected pension one will be required to work long past the age of 65 before retiring on less than $13,000 pa.)
The long term effect of the changes will be that the good rental stock will revert to home owner occupation over time and the available rental pool will be reduced to substandard "old do up" type accomodation again, with ever increasing rentals as landlords try to have their properties self fund. Rent increases will be fueled by rising interest rates and the increased demand due to net migration increases currently being experienced.
The Australians tried this several years ago and it was a total failure.
I hope our government have more sense than to copy the mistakes which have been proven to fail in Australia, and in tern give those who voted them in a chance to retire in some form of comfort and dignity, having worked hard and then gone without to put their hard earned dollars in to paying off a mortgage rather than pissing it against the wall every Thursday / Friday night.
This could be the last straw for those who have hung in and chosen to remain living in NZ.
Australia and its other benefits may soon reverse the net migration figures, yet again, as those left here with half a brain or more, choose to cross the ditch en mass leaving behind a country destined to become a land of zero opportunity for those who legitimately try to better their lot.
On 30 January 2010 at 3:49 pm Christopher said:
Aaargh - the anguished screams of vested interests.Nobody knows yet what the new taxation rules on investment properties will definitely be. As an owner of investment property my view is that the current rules are nothing more than other taxpayers currently subsidising those who choose to own investment properties. That does not pass any test of fairness.And yes my tax returns are based on the current rules. There are lots of reasons for people to leave Aotearoa including the economics of employment conditions, climate and lifestyle.The numbers leaving will crank up again in line with improving economies overseas.
Will changing the rules on investment properties increase the departures ? Compared to the 600,000 approx kiwi diaspora already offshore and the other reasons people leave, it'll be barely a blip. Why would you stay if you you are in the top 10% of income earners paying almost 50% of the tax take?
A worse outcome for NZ will be the requests for wage increases in the main centres if/when landlords put there rents up.
Having come out in support of change i have to say that it would be unreasonable of the government to change the rules overnight. Landlords should at least be given the courtesey of say 12 months to rationalise their investments if they wish and to avoid a potential loss of value.
On 31 January 2010 at 11:06 am Geoff.Hall said:
I was in NZ the weekend that the NZ Herald posted all the tax options for landlords.
All I can say is that rents will skyrocket.
A few years ago the NSW state government decided it was a little short of funds , so the LAND TAX card came out.
There is a threshold of about $380K, but this time it included any rental property in NSW. No threshold.
This effectivley caught all landlords. This based on current value (a little trick to the threshold figure, once you have bought your rental or beach house, it is then added to your own home !!!)
It is starting to get expensive now, so LAND TAX bills of thousands of dollars were very common, not to mention the builders that had blocks of flats in construction,!!!! the cost was unbelievable.
Why I have mentioned the above is that three years on rents are skyrocketing.
My rental (large 2 BR high quality apartment in a block of 14 in Parramatta) has increased $100 last year.
It is predicted to go up another $100 this year. Not fair you say! Here's the reason - all the builders left the state because of the LAND TAX and the ease it just can be applied. No construction - no rentals - 1000 people a month moving into Sydney - guess what - rental increases - Now the latest report rates AVERAGE rental in 2010 to be $400 for 2BR accomodation and $500 for 3BR accomodation.
I live close to my job so I do not live in my rental. My rent has gone up $5 a month last year, and is to continue this year, I have spoken to the agent and the owner.
It is a ongoing cost which is now taken for granted. You may wonder why rents in and around Bondi are very high ($500-$2000 weekly)- it's LAND TAX that does it, remember - threshold.
The same will happen in NZ, mark my words, if LAND TAX is brought in. I still have a rental property in NZ so I am affected as well, the exchange rate makes owning property in NZ very attractive, as a few of my work mates have found to their benefit.
Let's hope the govt uses some brains in this instead of just a dollar drive, to fill up the coffers.
Just a humour note to finish. The NSW state premier of the time, Bob Carr, bought 2 properties in and around Queenstown, no LAND TAX applicable!
On 1 February 2010 at 10:23 am David (Thew) said:
I have owned a new 4 bed brick rental for 6 years
It now has a rental shortfall. Talk of changes such as a 0.5% Land tax, removal of Depreciation, ring fencing losses, Capital Gains Tax and/or RFRR; I have just thrown the property on the market for sale as I cannot afford any more losses on the rental.
It current rents at $550 a week but if a lot of these changes come in, I would need to raise the rent to $750 a week or more to break even.
The house will almost certainly sell to an owner occupier thus being a loss to the rental pool.

The Land tax option with no threshold will crippling to many owners especially the retired and penalise those who scrimped and saved and showed moderation to acquire assets, and in Auckland would cause rents to rise about $50 ~ $100 a week.
On 2 February 2010 at 9:42 am M Lemon said:
If the government follows the recommendations of the Tax Working Group to whack the personal tax rate down, it will offset the tax increases for property investors.

Discussions about the land tax should be reported in that context. Every expert who studies the NZ tax system says it is crazy and needs to be reformed. It penalises top wage earners, the country's most productive professionals, and creates incentives for them to hide income in tax shelters, further distorting the economy.

It would be nice to see property investors form a coherent response to the Tax Working Group's proposals. In other words, if you don't like their ideas, offer some of your own.
On 2 February 2010 at 12:19 pm Jeremy said:
Personally I dont think National woudl dare levy a land tax. For one, I dont think they would be able to win another election if they did so.

I dont really understand why the Govt is so anti property investors in the first place. I only have one investment property at the moment (although I have had more). To me it is my retirement fund. Now why would the Govt want to ruin peoples retirement funds? Do they want us to be totally dependent on the State instead of trying to look after ourselves?

And if they did bring in a land tax or other property tax, it would NOT make me invest any money in the sharemarket which seems to be their objective. Shares are not my investment of choice and is too much like gambling to me. I would be more likely to buy property in Aust.

I already pay a huge amount of tax (and rates which are also a tax). I will never believe it is fair or just to try and increase this burden in order to keep more civil servants in meaningless work.
On 10 February 2010 at 11:43 pm Hamish said:
Well it looks like depreciation is gone, which is probably a good thing. I mean borrowing thousands of dollars from the tax payer and paying it back with inflated dollars was a bit unfair.
On 14 February 2010 at 2:03 pm Bob said:
We're not all in it to make huge profits. I just bought my first rental property before Christmas. Am intending to rent it for a while until I have reduced my mortgage enough to move in myself. The property will pay a slight dividend after rent in and expenses out but I'm more in it so I can finally get a foot in the door. Removal of the depreciation factor will not have much of an effect on me but it was nice to know I could have afforded it if I could. Surely if landlords dump their properties prices will go down. I am also considering dumping my newly acquired rental, sitting on the cash and if prices drop, I'll perhaps pick up a bargain in a year or so. Although to some people, property investors are probably the scum of the earth, lots of companies thrive on the side effects of property investors (whether they are living in or renting their homes) and if this stops it will possibly lead to more unemployment and worse times ahead unfortunately.
On 15 May 2010 at 9:16 am Bob said:
Interesting to see comments like this one

"They purchased these properties to hold long term with the intent that they would eventually supply them with inflation proof income"

This is one of the problems for the tax system, are they really rental investors if there is no real desire to make a crust from the rent rather its geaered to improving the properties over time and rely on the eventual resale.

Such intent looks a lot like property speculation rather than pure rental investment

Dont believe the 10 year myth either that only applies to property held by a dealer which isnt specifically brought for dealing making it taxable too if sold under 10 years.

There is no limit to how many years a property is held or if its rented in the meantime, if its brought with the firm plan of resale it can be taxed even if held and rented for 20 years.

The reality though is how many people would be honest about this and pay tax on the resale?
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