Do property investors really have "tax benefits?"

Monday 30 November 2009

As the government contemplates tax changes which would alter the tax rules for property investors, much of the commentary around perceived "tax benefits" has become misleading.

By The Landlord

By Jenha White

The government is waiting for recommendations from the tax reform committee which will table a variety of alternatives the government may implement to curb the Kiwi enthusiasm for property investment and balance the budget deficit, in the wake of falling tax revenues.

Mark Withers from Withers Tsang & Co says the perceived benefits of claiming losses are not unique to property investment.

"Tax benefits are construed as unique to property, but any farmer or business person in New Zealand that makes a loss can offset this against their income, subject to the structuring of their affairs.

"The suggestion that this is somehow unique to property investment is completely false," he says.

 If you lose $1 on property investment by incurring more costs than you earn in rent, the maximum tax benefit is 38% of the dollar lost.

To get that 0.38c from the government you have to lose the $1 first and even then, only if you have sufficient tax paid income to offset the loss.

"Where's the benefit in that?" Withers asks.

He says the "benefits" are only a by-product of circumstances where there's a genuine loss of money.

However, it needs to be acknowledged that property investors would only generally tolerate these arrangements if they had a long term expectation of capital growth in the property asset.

Withers says people do not invest in property to create losses. 

Generally they are looking to reduce debt in order to become profitable and enjoy some capital growth over time as they work towards this. Ultimately they pay tax on their profit just like everyone else.

"Where do you draw the line? Is a farm a property investment?" he asks. Many farms return losses as a result of the high interest costs on debt to purchase land, just as property investors do.

Farming losses are tax-deductible and capital gains are also tax-free "but we don't demonise them".

Withers thinks the government will choose to implement a form of land tax.

"I believe land tax is the front-runner because the tax revenue collected by the government would be extremely predictable and regular which is in stark contrast to capital gains tax."

He says ring fencing tax losses would collect more tax now but less tax in the future when losses that are ring fenced get offset against rental profits.

The government's biggest challenge in introducing land tax would be dealing with the extent to which it applies.

"Would it apply to the farming community? How about Maori tribal interests which have received Treaty of Waitangi settlements of valuable but perhaps largely unproductive land?"

He says politically that would be a big problem, especially given the need to keep coalition partners on side.

Withers believes if the government introduced a land tax at the same time as a cut in the top marginal tax rate, this may be less politically damaging.

"Introducing a capital gains tax mid term at a time when the property market is essentially flat or declining seems mad.

"Not only would it collect virtually no tax in the immediate future, it could be extremely unpopular with much of National's middle New Zealand voter base."

Withers says that his preference is that we remain one of the few western countries free of hated tax regimes like capital gains tax, stamp duty, and death duties, "but we shall see".

Comments from our readers

On 30 November 2009 at 8:50 pm John McCall said:
As implied in the article, it is ignorant to point the finger at property investors. It is a myth that property investors created the bubble of recent years - some property traders as well as supply and demand created that. Property investors provide much-needed rental property. If tax penalties are introduced a number of unwanted consequences will occur. eg- 1. Some landlords will get out of the market reducing rental property. It is unlikely new investors will provide this and a shortage will occur, driving up rents. 2. As investors get out and sell their properties fewer new houses will be built hammering an already depressed building industry. 3. Investors will pass on the tax costs to tenants and/or future purchasers. 4. There will be no effect on 'housing bubbles' as was shown in Australia. Housing prices are dictated largely by supply and demand. Therefore the only gain will be that the tax take will grow but will be applied to subsidise the shortgage of rental accommodation & a more-depressed building industry. Where's the gain in that? The only reason for politicians pursuing this idealism is for political objectives.
On 3 December 2009 at 8:41 am Mr Ed said:
I don't understand the statement: "Generally they are looking to reduce debt in order to become profitable and enjoy some capital growth over time as they work towards this. Ultimately they pay tax on their profit just like everyone else." We don't have a capital gains tax so ultimately they DON'T pay tax on their profit (their profit being the increase in capital realised when they sell the house a few years later) and that is the problem the Govt is trying to fix.
On 3 December 2009 at 8:46 am M Ng said:
Both Allan Bollard and Bill English made constant remarks that due to property investors' activities, the nation is taking in too much foreign debts. This is a myth!!! If a million houses are required in NZ, home-owners can afford to buy only 60% of them, the rest have to be absorbed by investors or other organizations, otherwise some people in NZ will have to live in doghouses or garrages. Based on 40% being absorbed by investors; then a $120 billions or more debt will be taken up. But if investors do not come in to the party, who else can do it? The State Housing probably, and at what costs -certainly more amd much more than the $120 billions, on top of that, there will be other hidden costs, admin costs, repairs costs, loss-of-rents, etc, which can run into billions$ as well!! So, if is clear a lie has been propogated! What a lie! The investors are providing badly needed social services, and because of that, they are penalised! What a joke! We have bunch of useless and irrational politicians! What a tragedy for NZ!!!
On 3 December 2009 at 9:03 am Janet said:
A MAJOR omission in Mark Withers regime (FDR)of taxing shares held (not traded, just buy & hold), this is a capital gains tax EACH year, and, under certain circumstances, if the share price reduces and a loss is incurred, that loss cannot be brought forward to offset future income. When the Mum & Dad's, or unscrupulous property people sell their property investment, they pay no tax on the capital gain. Even playing field??? I don't think so, and this is ignoring the now HUGE compliance cost from a tax perspective, of owning such shares.
On 3 December 2009 at 9:08 am Doug said:
It's being able to claim depreciation that causes the issue. It's OK on things like stoves which do need replacing but shouldn't be allowed on the house, since R&M are claimable as an expense. And how many houses actually get replaced (e.g. torn down & rebuilt), which is what depreciation is for.
On 3 December 2009 at 1:23 pm rob of the north said: forgot to mention if prop.investors didn't snaffle all the low end props. as they do now there would be more of them on the market thus increasing competition in that price band. shock horror..that would mean more houses available for young couples at good prices..darn
On 3 December 2009 at 2:18 pm ray clarke said:
The real problem in New Zealand is rampant levels of wefare which became a runaway under the third term of the last Labour Government. Regn in Government spending is the real issue not in punishing investors. Also Housing New Zealand (The Govt) are actively soliciting investors to buy new housing and they will guarantee the rent for 10 YEARS! In Australia the Govt is not in competition with private investors and its time Bill English woke up to that.
On 4 December 2009 at 4:41 pm nancy said:
re janet's comments on FDR being a capital gains on certain foreign shares each year is not strictly correct. the reason behind it was that foreign shares often pay lower dividends than NZ shares because foreign companies then to reinvest profits into the business which thus result in better capital gains for their investors. Shares under the FDR regime are thus taxed the on the impkied economic returns of investing in said shares. it is set at the lower of 5% of the opening value of the share or the combination of the dividend yield and change in comparative value of the share. se.g If the share pays a dividend of 5% or more and its price increases the max tax paid is based on 5% of its opening value. In this instance the investor pays no tax on the gains and in fact saves tax on any dividend yield which exceeds 5%. if the share makes a loss then the tax paid is on the combination of the actual dividend yield and the loss. so the investor gets to offset the loss against their dividend earning. If the loss exceeds the dividend received, then tax paid is 0 and the excess loss cannot be carried forward to future years. but you start the next year with a lower base so the 5% calculation is on a lower opening figure in your next financial year. Hugh Compliance cost? i dont think so. all very straight forward to monitor. Perversely the FDR regime was introduced in 2007 just prior to the stock market crash so in the past 2 tax year, I would surmise that the IRD would have collected zero tax from those investors holding shares subject to the FDR regime. this is not mentioned when the press reports on the IRD's reduced tax take. as both a property investor and a share investor, I hate seeing one sided argument put forwarded, with each set of investors trying to protect their corner. tax is a necessary social "evil" - if we make profit we pay our dues. we just ask the powers that be to be fair to all concerna - do not isolate one set of investors and subject them to constant attack. Property investors provide the housing stock that the government will not or cannot. They keep a whole lot of tradesman in employment. They are not demons and do serve a social function. Ambiguos tax laws and poor monitoring are the source of many of the IRD's ills. Proving Intention is a big headache. Better if the law is clear and simple eg sell within 1 years, pay tax on x% of the gains, sell within 2 to 4 years, pay y% etc. it is nice and simple, weveryone knows where they stand, no need to bother with intend. apply this across the board to ALL investment, then we wont have this constant shares vs property argument, trading vs holding ....
On 4 December 2009 at 5:04 pm Tony said:
I agree it is not so long ago when i sold a property there was a clawback of $52000 not such a good investment after ten years.
On 4 December 2009 at 6:36 pm Ian said:
Firstly we do not need another tax. - We need to get the drones out of the government shelter into productive work thereby reducing the need for tax but providing more from the existing base by real production of real goods and services in a competitive market. Second the concept of taxing the increase in the numbers for a property without taking into effect the inflation over the period is nonesense. We measure a number of things in 'real terms' i.e. taking out the effect of inflation so a capital is not a capital gain until the inflation effect is removed. This would effectively reduce so called capital gains on houses to ZERO Goverments went away from the gold standard to allow inflation to work its 'magic' so they could line up at the public trough and then tell us that in 'real terms' it was not what it seemed. GOOD GRIEF - GET REAL
On 4 December 2009 at 9:50 pm julie said:
I feel if the government changes the tax system, they better get ready to provide plenty of rental accommodation, because as a property investor of many years, I do not see any advantage of continuing to help the govt house people, if there is nothing to cliam, like the interest and being penilised for giving a service that the govt also offers (and has moved its rental rates to market rates), the long term result being no one will buy investment properties causing all house prices to fall, as investors bale out or cant claim back their losses, creating lots of houses for sale as the market slumps to a all time low and property being worth nothing, does the govt really want to see property investors move their money overseas and create a cynical spiral cycle of a declining economy in New Zealand ?
On 6 December 2009 at 1:23 pm Ian Thompson said:
I am annoyed at mr ed's misguided comments about making profit and the profit is all capital gain. Most long term investors and I mean 10 years or more aim to make their properties profitable that means more rent comes in than expenses. This profit is taxed as income tax the same as any wage or salary. If you are a property trader then you also have to pay tax on any profit you make when the property is sold. The problem was during the boom when every Tom ,Dick and Harry decided they could make a quick buck and trade houses without paying tax. The inland revenue was given 13 million to investigate these dodgy deals. I as a long term investor, providing a service to the public of NZ am sick of getting flak from people who have been misled by incorrect media and government speakers. I am looking at selling up and investing in commercial property where I will be left alone.
Commenting is closed

House Prices

Market rebound coming - Westpac

The cancellation of a capital gains tax combined with lower mortgage rates will be game changing for the housing market, believes Westpac’s chief economist.


Transforming commercial investment

Many investors are switching from residential to commercial property and now a new platform aims to makes access to the sector easier.


Investor lending weak in March

The latest Reserve Bank lending data reveals investors borrowed more than $1 billion in March, the highest figure since November, but a 10% fall on the same period last year.

Site by PHP Developer