The truth about flipping
Thursday 19 September 2019
Claims about the sky-high gains generated by property flippers ignore the costs and taxes that come with trading properties – and that means the profit assumptions are wrong, property experts say.
By Miriam Bell
Bring up the topic of property flipping, or speculation, and it’s bound to leave large sections of the public spitting in indignation.
That’s because there’s a widely held belief that anyone who buys and sells a residential property within a short space of time will be earning vast, untaxed profits while trampling over vulnerable people along the way.
But this belief relies on a number of assumptions – which have been showcased in some recent articles - that are blatantly incorrect, Auckland Property Investors Association president Andrew Bruce says.
“One of the big assumptions made is that property traders are not being taxed on any profit being made and that’s wrong.
“Anyone trading properties on a large scale, or as a business, has to pay income tax. Alongside that, these days there’s the bright line tax which has to be paid on investment properties sold within five years of purchase. And there’s also GST.”
Bruce says the people highlighted in the recent articles, which looked at property flipping in Auckland in the six years to 2018, are all people who operate property trading businesses.
“There is no way they wouldn’t be aware of their tax obligations, or that they wouldn’t be abiding by them and paying ample tax on what they have earned.”
Another common assumption is that the estimated capital gain of a property when resold is all profit for the person doing the trade, Bruce says.
“But, again, that is simply not true. The vast majority of property traders carry out work or renovations, which may not need consents but which improves the house and adds value, before selling.
“So there are renovation costs, holding costs to cover the mortgage, legal costs and selling costs. Even if you sell well, the profits are nothing like the popular estimates.”
This type of trading improves the housing stock and, given the pressing need to improve the country’s housing stock, is a good thing, Bruce adds.
“There’ll always be some aggrieved former owners but you can’t really complain if you chose to sell your house and it then sells for more, especially if it’s in a hot market.
“There might be the odd example of unscrupulous behaviour, but it’s the exception rather than the rule.”
Veteran landlord Peter Lewis agrees. He points out that property trading is a legitimate business enterprise and an acceptable activity in a free market.
“Having a capital gains tax wouldn’t make any difference. Because those people who are in the trading business, they pay tax on what they buy and sell already.
“Anyone who says otherwise should know better. But usually the trading profits presented in the media are before any tax, costs, and so on has been paid, so they misrepresent the reality.”
On top of this, traders are taking a risk and putting in lots of work, Lewis says. He doesn’t go in for property trading because he doesn’t believe the time, effort and risk is worth it.
“Most of the time people actually don’t make the huge amounts from every sale that is implied. I know plenty of people who have gone broke doing it. It’s a bit of a gamble in fact.”
Lewis is far from alone as many investors are not keen on flipping properties and prefer to stick to other strategies, with “buy and hold” being the most popular.
Property investment mentor Lucia Xiao is one such investor. She says investors are accumulators while property flippers are traders and she encourages people to be investors.
“In my view, flipping is not the way to go. There are agent fees (2-4%), GST (15%), holding costs, the renovation costs – and then there’s further taxes. After all that, the net profit simply isn't worth it considering the time, effort, energy and risk required.”
Xiao says property investment which allows people to increase their income and translate that income into assets is a much better option than flipping.
Property flipping may have been more common during the heady days of Auckland’s recent boom market, but even then it was well down on its prevalence in past property booms.
Back in 2017, CoreLogic data showed that 7% of Auckland sales in 2016 were properties that were sold within a year. That is as compared to 11.7% at the peak of the boom in the mid-2000s and 9.2% in the mid-1990s.
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