IRD at it again (attn all landlords)

[SEC]

Another deadbeat idea that sucks and should be stillborn. The bloody IRD can't create a depreciation rate for residential buildings that is lower than any other building??? Something very wrong here. I note that submissions can be made before Sep 30 and I might just point out to the plonkers the above anomaly.:(:(:( Suggest other landlords on this site make submissions as well. Either the rule applies to ALL buildings (commerical, retail, office) or not at all.

Maybe I'll state all my residential properties are commercial properties. Beat that, taxman.

SEC


Tax man takes a hard look at landlords

13.07.2004
By BRIAN FALLOW
The tax man will take a bigger bite out of landlords' cash flows if changes proposed by officials to the depreciation regime become law.

In an issues paper released yesterday, officials say the present regime for residential rental properties, which allows an annual deduction of 4 per cent of a building's diminishing value over 50 years, may be too quick for rental properties.

They propose replacing it with straight-line depreciation of 2 per cent a year (which would be equivalent to about 3 per cent a year on a diminishing value basis).

But Auckland Property Investors Association president Andrew King said that would just make rental properties more expensive. "It will be passed through to rents," he said.

A key concern for the Government is the extent to which the tax treatment of rental properties is being used to shelter other income.

Even though the number of people declaring rental income increased by 95,000, or 150 per cent, between 1991 and 2002, the net taxable income from landlords fell from $200 million in 1991 to $137 million in 2002, and an estimated $190 million last year.

In 1999 and 2001 the tax take was negative.

If the amount of deductions (not just depreciation but repairs and maintenance and interest costs) exceeds the income from rents the resulting tax losses can normally be used to reduce taxable income from other sources - a phenomenon known as negative gearing.

The amount of tax shelter available from rental housing has been running around $400 million a year since 1999.

From the tax man's point of view, even revenue of $190 million is a meagre 1 per cent yield on the $19 billion which is invested in rental properties according to a 2002 study of New Zealanders' net worth by the Retirement Commission and Statistics New Zealand.

The second problem exercising officials is that more and more landlords are claiming separate and faster depreciation deductions for different parts of a building, such as electrical wiring, plumbing, hot water systems, carpets and internal walls.

Even though depreciation is clawed back by the IRD when the property is sold, taxpayers can enjoy timing advantages, officials say, and in some cases the advantages are permanent.

They suggest giving landlords two options. A list of separately depreciable assets would be drawn up, as in Australia, which would include domestic appliances, hot water cylinders, air-conditioning systems, light fittings, carpets and lifts.

It would not include wiring, plumbing and internal walls, which the IRD considers to be part of the building.

But King said it was logical to depreciate wiring and plumbing faster than the structure of the building because wiring and plumbing did not last as long.

The issues paper says landlords wanting to claim faster depreciation for the listed items would need to obtain market values for the assets on purchase and then again on sale.

The closing date for submissions is September 30.

[Stock Man]

quote:Originally posted by SEC


Maybe I'll state all my residential properties are commercial properties. Beat that, taxman.

SEC

[:0]Hey there SEC, - I'm sure they will find a way! [B)]


Rgds

[KJ]

Isn't there a case for not allowing depreciation on buildings?

[zyreon]

One sound argument may lie in the statement that 'investment in residential real estate is not the highest use of capital'

[the importance being the somewhat perceived tax benefit of depreciation, creating an incentive to invest in real estate]

oh well lets just hope he does it, ;) just gives us one more reason to vote labour out and national in

[Morch]

Could become an election issue and if DB takes the opposite view he will be very well supported!

[blackcap]

quote:Originally posted by Morch

Could become an election issue and if DB takes the opposite view he will be very well supported!


I cant see what the fuss is as far as the IRD are concerned. isnt depreciation clawed back upon sale of the building anyway.

I see they also want to look at disallowing the differential depreciation rates on chattels and fixtures.

[fundir]

blackcap,

being able to deffer tax is seen by the IRD as them giving you, the investor an interest free loan, especially as many investors hold on to the properties while on a high income and only dispose of them once retired and on a lower tax rate.

The idea of depreciation is to write off the cost of an asset over it's useful life, thus at the time of disposal the difference between book value and disposal value is minimal. What is happening with rental properties is that the difference is becoming large, which is why IRD are looking at changing the rate of depreciation to better reflect reality.

There are still other advantages to rental properties such as leverage, so this is not going to kill the rental property market off.

It would have been a killer if they looked at stopping losses from retals being written off against other income, as many property investors are deliberately structuring their rentals in to this situation to reduce current tax liability.

Look at the bright side, this is yet another reason to raise rents, therefore allowing yields to catch up with the market value of your rentals.

[pearljam]

Blackcap, more and more investors are buying and holding or if selling are attaching an additional page to the sale and purchase agreement stating that the property is sold with the assets at their depreciated value. Also once people are retired the clawback for the IRD isn't as much as they are generally on a lower tax rate. Add on to this inflation and it means that investors get a interest free loan and pay back a lower amount of the 'real' value of money

[blackcap]

Thanks for the responses guys, but I am fully aware of tax mitigation and structures planners utalise to develop this. It just seems to me that the idea of raising rents goes against the whole principles that the current government are promoting. (Not that I support the current govt in any means). Also the inconsistencies in tax law are a cause for concern.

I cannnot see why they moan though about people using rental property losses to offset other income, because people could also use business losses or partnership losses or any other losses to offset against income. Why pick on those in the business of providing housing to the less fortunate?

[pearljam]

Completely agree with you, with the percentage of people who are renting going up and the market slowing down it's not an opportune time to discourage investors in the residential property market. Residentail property investors are providing a service, why are we getting punished for it???

[fundir]

Blackcap,

you wouldn't be the only one suggesting that it's a devious plan to reduce private market participation and increase the nanny state if that's what you are thinking....

[thereslifeafter87]

Residential property investment is an unproductive use of capital.
I would say that one of the major reasons NZ has lagged behind the OECD is the extent of our investment in residential property compared to our investment in business.

But, you can't blame residential property investors. They get a 33% head start over people that invest in businesses that create value for the economy, provide jobs, increase exports.

You are only providing housing to the less fortunate if you are actively creating such housing, not because you happened to buy a house.

[KJ]

As a person who has owned rental properties until recently I am aware of the advantages of claiming depn.

However, one could put up a strong case for doing away with depn.Is it a valid expense?Have residential properties declined in value over the last 40 yrs? The first house that I bought in Auckland in the 1970's cost $25,000-that same house would be worth about $350,000 today.

[Halebop]

My stepfather, who started his working life in the exciting and colourful field of "Cost Accounting" taught me not to rely upon the government to make an investment work. Oh how those words come back to me now. If you need a tax rebate or statutory loophole to make something pay it can be written out of legislation as easily as it was written in.

There are plenty of examples in Australian and New Zealand business history of tax or legislative changes ripping the bottom out of investments.

To argue you will just raise rents to compensate is by no means a certainty. As Aspex points out - ability to pay is a major hurdle, as is bloody mindedness. Can you really count on your increased tax bill being a suitable argument at arbitration?

To those arguing how productive their property investments are - how well does it work for you without the depreciation allowance? This probably indicates something about how productive it is for the economy as well.

Negative gearing and the trend towards mortgage financed investment property parrallels this country's results as well. We export around 2% of our GDP as bank profits. The property boom has been attributed as a leading factor in us collectively spending 109.5% of our incomes this last year. Society doesn't owe anyone a robust property portfolio. In the longer run I'd suggest a positive current account would do more for that result than a higher depreciation allowance on residential investments.

Despite this, I imagine this is more government sponsored manuevering to ensure real estate slips back down towards it's longer term trend line. If the property market continues to soften you will see this measure quietly buried.

[$imon]

If you held the house for 50 years would you not expect to have to repair/upgrade/replace at least some of it during that time? Depreciation is also used to replace worn out assets and is a valid business expense, as much for a residential investor, who is in effect running a small business, as a large business such as a Contact energy, who need to replace parts of their power stations.

Plumbing, wiring, roof tiles, painted walls, damage by tenants etc doesn’t repair itself, and certainly not for free! Building codes stipulate that a building should be built to last 50 years, with other assets wearing out at different rates. Some assets will obviously last longer than the average rate, and some less.

Does the IRD really need an economics lesson as to why property values TEND to rise? It is the land and the right to use that land which goes up in value due to demand for a place to live and limited supply of such, not the buildings themselves. This explains the phenomenon of why almost identical buildings located in different locations will sell for wildly different market values. For example, if I was to buy a house in Tokoroa for $70k and ship it to Auckland and put it on a section in Takapuna, have I increased the value of the building? No, it’s still the same house, but it is the value of the right to use the land that has increased due to a more favourable location.

It is not the role of the IRD to dictate this how long an asset will last or why asset values rise and fall. They should stop sticking their nanny state snouts in whenever they can sniff out another way to steal from people trying to get ahead in life. I treat my portfolio as a business and I expect the IRD to do the same, including having the same depreciation rules!

$imon

PS: If they didn't take so bloody much off us in the first place, we wouldn't spend so much time/resources trying to wring a little back from them!

[madmike]

if i were all of you, i would keep mum really
lets face it, we are pretty lucky in nz with no capital gains tax!!!

negative gearing???
yeh, but positive cashflow!!!
if you are investing in rental property and taking money from your business or other investments to cover interest payments you are just stupid. to cover principal repayment is ok
rent recd - interest - r&m - rates -etc must always be greater than zero but the closer you get to zero the better...it would be better if you calculate this for each property but i believe to really push the risk/reward barrier the calculation should be over your total rental portfolio.

so when you retire you should insure that the property you live in is rent free (ie you should be paying a least a type of rent payment on your live in property while you are working ...your risk/reward barrier again...or is it just backing yourself saying that gain on your personal house will be better than what you are paying in interest.....yes and generally you own property is far better than your rental properties!!!! and if it isn't that will mean you are not married or/and dont have a opposite sex partner!!!!! have you ever met a woman who would live in otara and have a rental property in remuera!!!

so what am i saying...depreciation is a luxury in a (rampantly)growing market. if prices stay static or even decline over a number of years (refer the uk market in the ninties) yes depreciation on the fixed cost of a building is just (ie everything that is not nailed down) but,i would allow depreciation on everything in the kitchen...cupboards stoves etc... and everything in the bathroom....sink, bath, etc...as well as blinds aerials and ordinary fixtures and fitting, in any circumstances.

but apart from that, depreciation on the main building is just a favorable timing difference for the taxpayer. how much has the stone store in kerikeri depreciated????!!!!!or does the taxpayer have to pay for the 20th century bad building practises!!!!

now if you can buy something with a gst deduction on it and then resell as a going concern...thats where you can get the taxman

[SEC]

Interesting comments guys. My original complaint still stands, you can't have tax inconsistencies between different business classes. It's either across the board or not at all.

So if I work from home I can claim 4% building depreciation but if I let my house out I can only claim 3%? It's the same bloody house! Where's the sense in that?


The Keating Govt in the 80s tried to meddle with residential property tax laws with disasterous effect. the laws got repealed a year later.

SEC

[pearljam]

Here is valuation company Valuit's first thoughts on the matter

Initial Comment
This is a pretty good document from an investor’s perspective. This is nowhere as bad as perhaps the media had been making out. There will still be benefits for investors.
We will be meeting with leading property professionals and various MP’s over the next week and we will make further comment shortly.

[thereslifeafter87]

You might spend money on maintaining a residential property, but that is a deductible expense. Why should you be able to depreciate the house as well?

Sure, capital items with an actual useful life (stove, fridge etc.) should be depreciable, but as long as a house is well maintained, what is its actual life? 100 years? 200 years?
Maybe you should be able to depreciate it at .5% a year?

[dinosaur]

If the depreciation rates are changed, I can't see how the IRD can make the new lower rates apply to existing properties already in the 'books'? The new rates would apply to new residendial property purchases only???? It would open up a can of worms for the IRD if they did otherwise.

When the IRD correctly increased the depriciation rates on computers & software etc, if you already had a computer/sftware in the books, you couldn't suddenly apply the new higher deprication rates to them. You had to continue to use the old rates until they were disposed of. A retrospective change on residential property only would cause most accounting software to have a hernia.

[$imon]

87 dude, you generally can't deduct costs over $200 as an expense, so how do you account for putting a new hot water cylinder in? Or re-wiring? Or re-carpeting? Or painting? Yes that's right even paint should be depreciated!

$imon

[madmike]

quote:Originally posted by SEC

Interesting comments guys. My original complaint still stands, you can't have tax inconsistencies between different business classes. It's either across the board or not at all.

So if I work from home I can claim 4% building depreciation but if I let my house out I can only claim 3%? It's the same bloody house! Where's the sense in that?


The Keating Govt in the 80s tried to meddle with residential property tax laws with disasterous effect. the laws got repealed a year later.

SEC



sec
i'd be worrying about the individual vs company tax rate well before worrying about the depreciation rates

ie whs earns $1m pays $333333 tax
i earn $1m and pay $381270 tax

far unjust than a 1% diff in depreciation rate, and as i said before in the current market it all will be clawed back anyway...ie depreciation is just a timing difference.....the diff between co and individual tax rates is a permanent one

just think what the problem will be if capital gains tax is introduced

i beleive in fighting battles that materially mean something!!!

best wishes with your submission

[riskandreturn]

87,

Thankfully you have brought some sense into this discussion.

Some of the comments were quite a way off the mark IMO.

Depreciation is not intended to cover maintenance costs. It is intended to reflect the diminishing of an assets value over time therefore, if an assets value is not diminishing then it shouldn't be depreciated.

I also think that depreciation is given far too much weighting in discussion of rental property investment (residential).

The facts are being able to claim depreciation does not make a bad investment good. I think many lose sight of this.

I also agree that it is discouraging investment in sectors which would provide much more economic growth.

Those are just my thoughts though....

[riskandreturn]

Simon, absolutely you can deduct an expense over $200. You can deduct an expense of any amount so long as it is not an asset purchase.

A new hot water cylinder is a new asset so should be depreciated. You are likely to have expensed the old one over several years so have received the tax deduction (expensing) of this one. If you repair it you expense the cost. Easy!

Where did you get that paint should be depreciated? It is maintenance therefore expensed?

I think you need an accountant urgently.

[$imon]

IRD treats repairs over $200 as improvements to the asset. Under $200 and you can write it off straight away or in other words depreciate it 100% in the first year. Doesn’t depreciation simply mean expensing over the useful life of an asset?

Depreciation does indeed reflect the diminishing value of an asset, such as a building, and by implication the eventual need for the replacement of that asset. Nobody can convince me that buildings do not wear out and hence should not be depreciated. Agreed that land does not wear out and that it should not and is not depreciable.

As far as depreciating paint, I have heard it somewhere in property investor circles, can’t remember where, but did think it a little extreme. The story goes that you cannot claim paint as maintenance unless it is only to bring it back to the standard of when the property was acquired. So if you buy a do-up, and paint immediately then you can’t claim it as maintenance. This is the IRD stance, not mine.

I understand there is quite a grey area as to what defines repairs vs improvements, mind you IRD seems to have grey areas everywhere, hence why there is so much confusion and a whole industry around how to get around those grey areas! If they just kept their rules simple, easy to follow and like their motto “fair” then most people would be content.

[pajama]

Suggest you speak to an accountant with experience in the property (which seems to mean residential in this context). The $200 + GST threshold relates to capital items that CAN be written off even though they are not R & M. eg a new office chair for $199 can be expensed. There is not a dollar limit for R&M but rather a reality test ie Is it R&M or capital in nature. The actual $ involved are not important although clearly the larger the amount the more likely it is to be capital rather than R&M. I do not belive painting a property could ever be considered capital - it is ongoing and necessary to maintain the property. There is some confusion here and I suggest strongly those affected consult with appropriate professional advisors.

[Capitalist Pig]

$imon,

I love the grey it where you make the green!!

With all the complications it is great as at the moment I am reaping huge rents ($320 for standard '3dog box'), values have gone up 50%, welfare (that what it really is! and I don't care what lefties call it today) pays rent directly into my accounts and at the end of the year the IRD gives me a tax refund for my efforts!

Oh also my mate Andrew King with his recent new release that investor's will only pass extra costs on to renters if depreciation is reduced was brillant and I sure the hand wringers in welfare will convince IRD to give up their plans to hit us investors as we struggle under our mountain tax losses.

As for 'what is fair', who gives a rat's **** , I win you loose, Ha Ha!

[pearljam]

This is an excerpt from a Valuit who i use for depreciating my rental properties

WHAT DO THE PROPOSED DEPRECIATION CHANGES MEAN TO YOU?
What a couple of weeks it has been. Since the discussion paper was released we have been busy in meetings with Investors, Property Professionals and MP’s discussing the impact this is going to have.
Put very simply the proposed changes will mean some depreciation rate changes. These rate changes will be in the form of reducing the rate for some items and therefore the depreciation in the short term. Over the long term the depreciation will be very similar. The result will be a reduction in cash flow for investors in the early years of ownership.
We have done some examples as part of a group of Professionals that is working together to inform investors of what is going to happen.
The following is an explanation of the proposed changes. The table at the bottom of the article will help to explain the effects on cash flow.
Note: a copy of this article along with further diagrams is available on our website on the Current Issues page (www.valuit.co.nz).

Buildings
As an investor currently depreciating your $100,000 building at 4% Diminishing Value (DV) the depreciation is $4,000 in the first year.
The IRD proposes the depreciation rate to be 3% DV or 2% Straight Line (SL).
With the rate at 3% DV the deduction would be $3000 in the first year. Therefore, you would be approx $330 worse off or 6$ per week for cash flow in the first year based on a tax rate of 33%.
If you claimed the proposed 2% Straight line the deduction would be $2000 in the first and every year after. Therefore, you would be approx $660 worse off or $12 per week for cash flow in the first year based on a tax rate of 33%.

Chattels and Fit-out
As an investor you can currently claim depreciation separately on fit-out and chattels. These are at various rates but on average work out to approx 10% DV. For Chattels and Fit-out worth $60,000 this would mean $6,000 in depreciation in year one.
We are unsure of what items exactly IRD will classify as building for depreciation but some of the items that we currently claim at increased rates will default back to the building rate as shown above. As we are unsure we have done two calculations. One based on a worst case scenario (larger number of items reduced to the building rate) and a best case scenario (few items)
Under the best case scenario it is estimated that the average depreciation rate would drop from the current 10% to 7%. This would reduce your first year cash flow by approx $600 or $12 per week.
The worst case scenario would reduce the average depreciation rate back to approx 5% which would mean a reduction in cash flow of $1000 or $19 per week. A big drop.

WHAT DO THE PROPOSED DEPRECIATION CHANGES MEAN TO YOU?
What a couple of weeks it has been. Since the discussion paper was released we have been busy in meetings with Investors, Property Professionals and MP’s discussing the impact this is going to have.
Put very simply the proposed changes will mean some depreciation rate changes. These rate changes will be in the form of reducing the rate for some items and therefore the depreciation in the short term. Over the long term the depreciation will be very similar. The result will be a reduction in cash flow for investors in the early years of ownership.
We have done some examples as part of a group of Professionals that is working together to inform investors of what is going to happen.
The following is an explanation of the proposed changes. The table at the bottom of the article will help to explain the effects on cash flow.
Note: a copy of this article along with further diagrams is available on our website on the Current Issues page (www.valuit.co.nz).

Buildings
As an investor currently depreciating your $100,000 building at 4% Diminishing Value (DV) the depreciation is $4,000 in the first year.
The IRD proposes the depreciation rate to be 3% DV or 2% Straight Line (SL).
With the rate at 3% DV the deduction would be $3000 in the

[SEC]

quote:Originally posted by ari

Taxation Update
Labour's residential property tax grab

In the last year, the government has made a surplus of $7.4billion. Each and every New Zealander has paid over $1500 in tax that even Dr Cullen hasn’t been able to spend.

The IRD now proposes taking around $22million of extra tax from residential property investors, through adjusting property depreciation rates. There are 164,000 private landlords with at least one rental property.

Changes could be in place as early as April next year. I don’t believe the changes are fair, and want to send the government a message that penalising property investment - when for so many it's a means of saving for their retirement - is unacceptable.

I have set up an online petition against the proposed changes at www.depreciation.co.nz. The site also has more information about the IRD's discussion paper.

I urge you to visit the site and sign the petition. If you like, you can also make an online submission to the Select Committee considering the proposal. Time is of the essence though – the deadline for submissions (and the petition) is September 30.

Costing a tax cut - no slashes to social spending

In another taxation development, ACT has agreed to let Treasury cost our policy of decreasing and flattening income tax rates. ACT believes that tax cuts would be good for workers and their families, and could be afforded without cutting a single dollar from social spending.

Dr Muriel Newman
ACT Deputy Leader



I have had a chance to skim through the discussion document and although I disagree on their reasons to cut depreciation rates, at least they are 'consistent across different forms of investment'. Therefore it also covers retail and commercial property. And it surprises me there has been no backlash from these sectors, ie property trusts, commercial property owners etc.

Nevertheless it has been a (small) factor in my decision to sell my rental properties before the end of the FY (60% capital gain in 2 years and unrealistic NZD-AUD x-rate are the major factors).

SEC