Apart from a five year Brightline test compared to the 10 year period for second hand properties, Gilligan says investors can claim chattel depreciation on a build.
“Investors can identify the new chattels and break them out and separately depreciate them.
“Also investors get the added benefit that anything related to fixing a new build is automatically classed as repairs and maintenance because they are clearly not improving the capital side of the property, just reinstating it to the previous state, which is new. In other words, the IRD can't allege that it's capital maintenance because it is just being reinstated back to the house when it was brand new.”
Gilligan outlining his views to a recent Bayleys Old vs New Property webinar says new build tax exemptions, coupled with these relatively well-known but sometimes not thought of benefits, do stack up in favour of new builds, particularly if new builds have good cash yields.
“It’s a little bit about how new builds are exempt from the interest deduction rules and a shorter Brightline test benefit as it exists.”
On the ring fencing of losses for property investors, which Gilligan labels another unfair tax rule along with the removal of mortgage interest payments as tax deductible, there are no plans to change it from any of the political parties. “ACT’s David Seymour says he'd be in favour of changing it, but he doesn't have the budget for it in his fiscal plans. There is pretty much no chance of loss ring fencing being repealed,” he says.
Another rule that could be coming to an end if National and ACT form a new government is tenancy terminations. Landlords have to either move in themselves, sell the property, extensively renovate it, or rebuild it to get a tenant out. Both parties have said they repeal that law.
Gilligan says as the business of being a landlord becomes more onerous, he is often asked by investors what is the best tax structure, a question that is impossible to answer as everybody’s individual circumstances are different. But he says a couple of the common structures used are:
So tax structures do need to be tailored to individual circumstances. They're pretty complex things and easy to get wrong, Gilligan says.
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They - quite correctly - then deduce that the return from doing this is so poor that those who invest in rental property must be doing it solely for the capital gain. This is then used to reinforce their argument that 'we need a CGT'.
Where their study falls down is that successful property investors do not buy an average house and the rent it out for an average rent.
They buy well, often buying where a property needs improvement or where alterations and renovations can increase rental income, or from a vendor who for their own reasons are desperate for a quick sale.
Having bought that property and rectified whatever is wrong for it they then get a profitable return.
That's where the skill of being a successful investor lies, and not many people possess that skill.
Despite what these studies portray, it's not a matter of simply buying any property at any price, chucking a tenant into it, and standing back waiting for the gold bars to fall out of the sky.
This is the fallacy of trying to get investors to 'invest' in new builds.
A new build cannot offer this opportunity, it is what it is and as such can usually only offer the opportunity of an ongoing running cash loss to the investor.