What change will we see to property taxation?

The powers that be aren't quite sily enough to introduce a capital gains tax. And disallowing interest, although taked about, flies in the face of common sense and accounting practise anywhere. It amounts to a tax on turnover rather than on profit and that's unworkable. (Only Jim anderton thinks that sort of nonsense can work, for those who remember Jim - he was easily forgettable.)
So I'm picking the gummint will disallow depreciation as a deductible expense on residential property. That might not be a bad thing compared to any alternative. Land values usually increase so there's a built in compensation.

The tax working group report is here:
http://www.victoria.ac.nz/sacl/cagtr...rt-website.pdf

Page 44 has suggestions for broadening the tax base. Seemingly something akin to FDR for property - i.e. a deemed nominal risk free return (RFRM) of 6% on property investments.

Also suggestions re land tax and modifications to depreciation.

I'm not sure we'll see any in the short - medium term. But its something I'll have to look at more closely.

Initial thoughts though.

The governement and city councils are substantial land and residential property holders. Any tax increases are likely to impact on the tax payer to fund central and local governemtn obligations.

Maori have considerabe land holdings (and getting bigger with treaty settlements). National (and later Labour) are unliky to do anything that impacts on the Special Peoples pockets. If you are looking for evidence look at how forests were handled as part of the ETS negotiations.

Politicians have considerable personal holdings in property. Even the Greens hold rentals in trust for their MP's superannuation. We might like to think that there is no self interest with our politicians behaviour - but that would be naive and wrong.

Politicians also rely on their electotate to vote them back in. Most of the electorate either owns property or has a desire to own property - this desire is still fuelled by Governement policy. A government is unlikely to implement change at the risk of loosing votes.

Anything that impacts the return on rental property has to be closely looked at. Allready, IMO, the return is pretty dubious. The governemnt is unlikely to do anything that will increase the costs of owning a rental for fear of people quitting rentals or not putting any money into them - leading to squalor for renters.

Capital Gains Tax and deprecition on Rentals are two easy things to look at. But IRD already has the power to look at the depreciation claimed aganst the sale value achieved - though it seems perhaps they don't have the resources to look at this in much detail. But it is, again IMO, clearly a rort.

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Originally Posted by minimoke

But IRD already has the power to look at the depreciation claimed aganst the sale value achieved - though it seems perhaps they don't have the resources to look at this in much detail. But it is, again IMO, clearly a rort.

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It's hard to see a rort. All plant and equipment in any other taxable activity is allowed to claim depreciation - why should it not be allowed on buildings?

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Originally Posted by fungus pudding

It's hard to see a rort. All plant and equipment in any other taxable activity is allowed to claim depreciation - why should it not be allowed on buildings?

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Because there are two main components to the residential rental market. One is land; the other is improvements. Buildings only make up part of the improvements. Depreciation applies to curtains and stoves etc as well. Land has increased in value but not to the extent shown in property valuation increases - particularly pre 2007 peaks. Which means the other part of the increase has had to come from the improvements. So the improvements have actually increased in value rather than depreciated.

I'm not suggesting that the depreciatiton shouldn't be allowed - its just how it is treated at sale time.

The most simplistic change would be to not allow depreciation on rental properties and this may be politically acceptable...

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Originally Posted by minimoke

Because there are two main components to the residential rental market. One is land; the other is improvements. Buildings only make up part of the improvements. Depreciation applies to curtains and stoves etc as well. Land has increased in value but not to the extent shown in property valuation increases - particularly pre 2007 peaks. Which means the other part of the increase has had to come from the improvements. So the improvements have actually increased in value rather than depreciated.

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But that's the nominal increase. In real terms it will have depreciated, or moved further below its replacement cost.

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Originally Posted by fungus pudding

But that's the nominal increase. In real terms it will have depreciated, or moved further below its replacement cost.

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The improvements no doubt move below replacement cost - but it appears property buyers are prepared to pay a premium for those improvements at the time of sale/purchase. In the end it is the owner at the time of replacement that bears the cost of replacement - previous owners have had the depreciation.

Its probably about time for residential rental owners to look at rentals as a revenue opportunity rather than a tax vehicle. This is wheer I think cjages to teh tax system can be made - but it won't be easy and there will be fall out.

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Originally Posted by minimoke

Its probably about time for residential rental owners to look at rentals as a revenue opportunity .

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As a revenue opportunity, majority of residential rentals suck. There is inadequate risk premium built in. Govt flirtation with property may cause, among other things:
1. Property values to dip short-term, then rise wiping out the Kiwi dream
2. Private investment to quit residential rentals forcing Govt to supply social housing
3. Rents to rise exponentially in the short-term leading to inflation = headache for Govt and RBNZ
4. Damaging the one investment Mrs and Mr Kiwi trust and understand, without contributing to the increase in either trust or knowledge of competitive risk assets

Revenue paucity is taxing the Govt, and as usual residential rentals have been picked as everybody's favorite fall guy. Raising GST is fairer and the lesser evil. Given our current account and imminent budgetary need, change is certain - even desirable. But where and how? Maybe its time long-term (system ripper) beneficiaries and (low risk) prisoners were gainfully employed in social projects. Let each man and woman carry their fair share of load. Or is it not yet?

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Originally Posted by beacon

Govt flirtation with property may cause, among other things:
1. Property values to dip short-term, then rise wiping out the Kiwi dream
2. Private investment to quit residential rentals forcing Govt to supply social housing
3. Rents to rise exponentially in the short-term leading to inflation = headache for Govt and RBNZ
4. Damaging the one investment Mrs and Mr Kiwi trust and understand, without contributing to the increase in either trust or knowledge of competitive risk assets

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Which is why I don't think we'll see govt fiddling too much.
1 = lost votes
2 = This isn't what National is about. They are supposedly about less government - not more
3 = this is an area that does need addressing - rents do need to rise to make the investments worth while. (but that then mean slook at teh Accomodation Assistance in the various govt benifits - means more tteh govt wil lhave to pay which means more taxes collected.
4 = Too many investors stung by '87 and '08 to want to go anywhere other than property.

I agree with your observations MM. This little distraction will go the same way as other issues the Act Party has asked to be reviewed. When the Minister of Finance is a property investor himself (or his various Trusts and LAQC's), what chance will a proposed change in the present situation have?

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Some camps mightn't discount some sort of munted or mungled version of a deemed % return on cost for assessment of a deemed tax - since this hybrid has been applied in other areas - such as offshore share investment returns in certain circumstances.

As much as it irrespectively imposes taxes on capital regardless of whether an actual return or not or out of capital for being in the market, it might be a solution of sorts for something that might otherwise hit the "too hard basket"

A first attack on depreciation claims was some years ago on Building Losses on disposal becoming non deductible generally & assessibility of depreciation recoveries I vaguely remember.

There is little question that over considerable time there must be adjustment for loss in value on structures as newer are built along & older structures become delapidated or outdate standards without upgrading / remodernising

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Originally Posted by fungus pudding

It's hard to see a rort. All plant and equipment in any other taxable activity is allowed to claim depreciation - why should it not be allowed on buildings?

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Agreed .. they are part of an income generating Asset base, therefore depreciation should be allowed

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Originally Posted by minimoke

The improvements no doubt move below replacement cost - but it appears property buyers are prepared to pay a premium for those improvements at the time of sale/purchase. In the end it is the owner at the time of replacement that bears the cost of replacement - previous owners have had the depreciation.

Its probably about time for residential rental owners to look at rentals as a revenue opportunity rather than a tax vehicle. This is wheer I think cjages to teh tax system can be made - but it won't be easy and there will be fall out.

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The very tax rates differentials & structuring over a long period have conditioned many to look upon things from a tax planning perspective.

Successive Govts have had more than ample opportunity to further address tax rates, moreso in the past decade but have shown themselves to be more happy to sit on their hands and do little or anything.

LAQC Abuse is one area which needed looking at, but looking at the whole sector tends to pang of sniffing out more Govt Revenue than anything else and something better addressed by Govt getting it's own expenditure cut back into shape rather than finding further means to maintain it.

They will introduce the risk free rate of return on rental property. The government has been softening the public up for so long that they will do something here and this looks most likely. I don't think this will be a vote loser overall, in fact it will probably go down pretty well with a lot of people who see property investors as greedy rich tax avoiding b#stards (they may be right in a lot of cases but PI's aren't the only ones, just easy targets).

They will make a big deal out of NOT introducing any property tax on owner occupied property but this may apply to second properties including rentals.

The really interesting thing will be what happens with GST. That could well be a vote destroyer. Particularly for low and middle income earners who are unlikely to see any benefit from tax relief on the upper brackets. I would have thought that a lot of middle income earners vote National but certainly increased GST would be more than offset by tax relief for a lot of their support base.

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Originally Posted by fungus pudding

It's hard to see a rort. All plant and equipment in any other taxable activity is allowed to claim depreciation - why should it not be allowed on buildings?

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It looks like IRD agrees with me. In todays paper 300 property investors are being targetted - and they will be only the tip of the iceberg.

Now don't get me worong, I'm all for tax payers taking responsibility for minimising their tax exposure. But residential rental investments aren't quite in the same league as a business owner with plant and equipment attempting to derive an income from his business. So many property "investors" use property not as a vehicle for creating an income but as an opportunity for reducing gross earnings. This then enables them to reduce their tax payments; increases their eligibility for Working For Families payments and some will even get a Community Services Card.

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Originally Posted by minimoke

It looks like IRD agrees with me. In todays paper 300 property investors are being targetted - and they will be only the tip of the iceberg.

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These 300 are people who bought and sold multiply properties in a year with an intention to profit.

As with shares, there is a pseudo captial gains when you intent to resell at profit. These people were clearly evading tax and can be distinguished from the M&D residential property investors who buy and hold long term.

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Originally Posted by CJ

These 300 are people who bought and sold multiply properties in a year with an intention to profit.

As with shares, there is a pseudo captial gains when you intent to resell at profit. These people were clearly evading tax and can be distinguished from the M&D residential property investors who buy and hold long term.

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It's not a pseudo vcapital gains tax. It simply forms part or all of their income and therefore attracts income tax. That seems to me the only problem - that it is not effectively enforced by IRD. They have all the power in the world to track and tax traders acting for gain by reselling, but they haven't bothered chasing it up since the 70s - they used to be right on the ball.

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Originally Posted by CJ

.... when you intent to resell at profit.

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And thats the point I've made previously about the M & D "investors".

What they have actually done is gone into rental property on the back of expected capital gain. If they were honest it wasn't for the income because yields on so many properties are so pitifully low they could have got more income by sticking their loot in the bank.

Sure, its not for IRD to question the decision making ability of the business owner but its not hard to see when someone purchased, made a cash loss and then flicked on for a capital gain. It also goes without saying that there are some residential rental owners who are in it for the long term - for them it will be easier to show they are in it for the income - but if you look at their books they will, on the whole, make more from the capital gain over time rather than the net income.

An outlandish statement some may say. But look at the median property 10 years ago. Valued at $170k. Today its worth $360k. Thats a $190k improvement or $365 a week. At very best you're only likely today to be grossing $360 a week in rent!.

Rental properties are a great "investment" which beats equities and otther investments hands down. You can borrow money from thee bank to fund your purchase and the interest costs go against your tax. You can personally depreciate the asset and gain the direct tax benifit your self (rather than it washing through a companies books and shared amongst the other shareholders); your gross incomes drops so you get governement handouts. Try that with money in a finance company or shares or metals!

And even if the bottom drops out of the property market you will never loose 100% of your investment (unless you are a dickhead and buy something in another city on a rent to buy basis and fail to insure your investment - then get a multi murderer living next to your property - and then have the local yobs burn your place down: but even then the benevolent council will come to some deal with you to get your land to build a park!)

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Originally Posted by minimoke

And even if the bottom drops out of the property market you will never loose 100% of your investment

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That's not correct. Remember gearing works both ways. Go in with a 10% deposit and guess what happens if the market drops 10% ? Bingo - equity gone. And at 20% you've lost double your 'investment'. Which leaves you with a loss making 'investment' which you can ride out - if you can be bothered sustaining several years of losses. Or bite the bullet - pay a commission and some legal fees, sell the property and find a way of topping up the outstanding bank loan.

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Originally Posted by fungus pudding

Remember gearing works both ways. Go in with a 10% deposit and guess what happens if the market drops 10% ? Bingo - equity gone.

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Good point - which is why it was madness for Westpac to be allowing 110% mortgages a couple of years back. But if we look at market trends, values have only gone up over time. So equity then becomes a function of one's ability to service a loan. Its not so much that the value in property will cause one to loose equity - its the increase in interest rates or lack of tennants prepared to pay the rent which become the problem.

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Originally Posted by minimoke

Its not so much that the value in property will cause one to loose equity - its the increase in interest rates or lack of tennants prepared to pay the rent which become the problem.

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The former has not been a problem so far for those who bought for long term.
The latter is where the cashflow continues to take a hit for this asset type. Further, as:

Interest rates rise = cashflow suffers (rentals business or any other).
Lending constraints = cashflow suffers + asset values strait jacketed ..
Current environment = weak economy, fickle recovery, high unemployment lingers...

Here's a typical M&D rental investment example (currently 0 gain play):

Asset GV: $325,000 (currently on unrealised loss, 3% CG expectation = 9,750 pa)
Rent pa: $ 16,000 (market based, no franchise power)
Insurance: $ 500 (rises yearly, regardless)
Rates: $ 1,750 (= tax, including ARC (= tax), but not water rates in some areas)
Maintenance: $ 1,000 (labour of love unaccounted, self managed)
Accounting : $ 500 (assumes simple book and record keeping)
Intt paid $18,000 (assumes LTV 70%, 8% pa intt only, no bank fees included)
Rent arrears :$ 1,000 (no substantial damage, weak economy, most likely to be written off
regardless of Tenancy Tribunal and court collections hassles)
Yearly Tax Paid:$ 0 (6,000 cash outflow, 9,000 loss with depreciation which is clawed
back by IRD on sale anyway, reducing your capital gain)
Buy Intent : Build retirement nest egg, holder for passive rental income
Reality : Buying future capital gain via tax relief instalments n regaular cash contribution

Add to this mix any further tax on rental property ( even risk-free rate of return tax on equity) and you squeeze cashflow even more - to the point that you'll end up waking the sleepy M&D investor to see how this investment class sucks.

Solution hoped for: They'll migrate to other risk assets
Result probable in my book: They'll migrate. Full stop. (or at least migrate their cash = economy suffers, downward spiral begins).

Looks like depreciation will be the only change.

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Originally Posted by Arbitrage

Looks like depreciation will be the only change.

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Not necessarily. How about losses on rental properties not being deducted from other income. Just carry them forward as is the case if a company owns them. LAQC's abolished.

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Originally Posted by 777

Not necessarily. How about losses on rental properties not being deducted from other income. Just carry them forward as is the case if a company owns them. LAQC's abolished.

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I agree. This seems an obvious move and would be in line with JK's comments today.

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Originally Posted by macduffy

I agree. This seems an obvious move and would be in line with JK's comments today.

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I think changes will be limited to the removal of depreciation, and clarification of the difference between Rand M and capital expenditure. It's a slghtly blurred line at present.

The fallout has begun..

The harder the line John Key takes on introducing any tax tinkering with residential property, the harder the property market will fall. That would be just the beginning.

Listings are up roughly 10% in the last fortnight, since this talk gained momentum. Squeeze, squeeze. Uh! There's nothing left to sqeeze...

Beware who one takes advice from. You don't ask for medicine from your tailor, so why take business advice from those that haven't a practical clue about business. It seems the face of the Government may have changed, but the core (bureaucracy) is very much entrenched. It continues to dole out numbers based on theoretical models. Sad to see the one-eyed being led by the blind... And so, the flight begins ...

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Originally Posted by 777

Not necessarily. How about losses on rental properties not being deducted from other income. Just carry them forward as is the case if a company owns them. LAQC's abolished.

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LAQCs aren't the tax rort people perceive them to be. All they are is companies that can pass losses on to shareholders. If the shareholders owned properties directly then they would be entitled to the same level of losses. LAQCs are especially popular with accountants because it means another entity that they can charge fees on. Abolishing LAQCs won't raise another cent in tax because people are would be very unlikely to use a normal company structure unless they were tax positive.

True. But will the losses be able to be written off against other income. This is where I think English will go. Why should a property owner never make any taxable profit over the period of ownership and write all the losses off. If they eventually do make a profit (Rent minus costs) then the losses previously made can be used against this profit until they are wiped out.

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Originally Posted by 777

Why should a property owner never make any taxable profit over the period of ownership and write all the losses off. If they eventually do make a profit (Rent minus costs) then the losses previously made can be used against this profit until they are wiped out.

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You have this choice if you do any business currently, property or no property. However, it is inequitable to single out and disallow depreciation for the residential rental owner, while keeping it intact for say Vector, Telecom, Auckland Airport et al.

I hear politicians making all this talk about what is fair and what is not? Yet I see no fairness in taking away an interim cashflow management tool from the small guy (who probably needs it more to keep head his head above water), while letting the big fish use it. Depreciation was no more than a Government trade credit to residential rental owners, eventually to be recouped at point of property sale.

If you want to disallow depreciation, and I can see the Govt reasoning to disallow it because the government needs the cash more to smooth out its own cashflow, budget better and keep the rating agencies happy etc., disallow it for all industries. Don't just single out one, that inequitable and unfair to boot...

LAQC's won't be scrapped. They are also used in forestry investment where early losses are high. So unless they define their uses more closely (i.e. stop their use for property investment), the Government won't want to upset the rural constituents.

The political cynic in me reckons that John knows exactly what he is doing. I believe he intends to remove the money-go-round depreciation as a pre-cursor for the larger money-go-round, working for families.

It is essentially an accomodation supplement for all tenants isn't it?

Potentially it could be depreciation removed from ALL buildings, not just residential. As a property investor I have no qualms about this.

It makes sense as depreciation is really just a timing difference and at the end of the day if a property investor is relying on the tax benefit to make the investment viable on a cashflow basis, then in reality it would have to have been a marginal investment in the first place. Could be a case of the chickens coming home to roost...

Disc: if depreciation is removed on buildings and the reduction in tax benefit squeezes cashflow and results in some investors unable to retain their properties, I will be waiting with my chequebook open... :D

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Originally Posted by Steve

Potentially it could be depreciation removed from ALL buildings, not just residential. As a property investor I have no qualms about this.

It makes sense as depreciation is really just a timing difference and at the end of the day if a property investor is relying on the tax benefit to make the investment viable on a cashflow basis, then in reality it would have to have been a marginal investment in the first place. Could be a case of the chickens coming home to roost...

Disc: if depreciation is removed on buildings and the reduction in tax benefit squeezes cashflow and results in some investors unable to retain their properties, I will be waiting with my chequebook open... :D

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Yes. There is bound to be an over reaction, and residential property may become a sensible investment again for the first itme in many years. I don't think there is any intention to limit the change to residential though. All buildings will be affected - or that's what I thought he implied.

how would this affect listed property trusts

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Originally Posted by voltage

how would this affect listed property trusts

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They will have to reduce their distributions, so they'll drop a little, unless existing holdings are exempted with new laws applying to new purcases only. If that is the case, their distributions should remain and they will look even more attractive compared to a new property-purchase, or buying into a new commercial syndicate or similar structure. So to answer your question - who the hell knows? We will have to wait for more details.

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Originally Posted by fungus pudding

They will have to reduce their distributions, so they'll drop a little, unless existing holdings are exempted with new laws applying to new purcases only. If that is the case, their distributions should remain and they will look even more attractive compared to a new property-purchase, or buying into a new commercial syndicate or similar structure. So to answer your question - who the hell knows? We will have to wait for more details.

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I should add that it may mean PIEs lose their special advantage which may mean they will have less appeal, although I'm not convinced that investors generally had cottoned onto the tax advantage of them.

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Originally Posted by fungus pudding

I should add that it may mean PIEs lose their special advantage

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If property loses its special tax advantage, so should pies. Pies even help people screw the WfF regime.

So all in all we could well see "Ring Fencing"
BB

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Originally Posted by Billy Boy

So all in all we could well see "Ring Fencing"
BB

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Which would fly in the face of normal business accounting. That is taxing some poor sod on moeney he hasn't earned, or may not have. :(

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Originally Posted by fungus pudding

Which would fly in the face of normal business accounting. That is taxing some poor sod on moeney he hasn't earned, or may not have. :(

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Yes But......
The problem is overall, so much money is going into property. The banks are borrowing, etc etc
The problem or result the Gumment wants is.... less $$$ into property and more into other
investments like shares, fixed, etc
BB

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Originally Posted by Billy Boy

Yes But......
The problem or result the Gumment wants is.... less $$$ into property and more into other
investments like shares,.....
BB

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Shares - now theres a good idea. Drive investors into the wilder west that is our share market. Take ALF. One minute you have the NZX letting its prefered people know ahead of the dums and mads that they are going to enter the Index. Result - a big increase in SP. Shame ALF didn't let the market know as well. Then what happens NZX reverses its decison a few days later. And why is ALF going to get into an Index - because a Finance Company stuffed up so the D and M's run the risk of loosing all their money or just some of their money.


Its that sort of thing that steers people away from shares.

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Originally Posted by minimoke

Shares - now theres a good idea. Drive investors into the wilder west that is our share market. Take ALF. One minute you have the NZX letting its prefered people know ahead of the dums and mads that they are going to enter the Index. Result - a big increase in SP. Shame ALF didn't let the market know as well. Then what happens NZX reverses its decison a few days later. And why is ALF going to get into an Index - because a Finance Company stuffed up so the D and M's run the risk of loosing all their money or just some of their money.


Its that sort of thing that steers people away from shares.

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Behave yourself MM.... You know very well what I'm saying, in general.
I dont really have to spell it out do I ??
BB :)

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Originally Posted by Billy Boy

Behave yourself MM.... You know very well what I'm saying, in general.
I dont really have to spell it out do I ??
BB :)

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Apologies - it must be the sun getting too me. Thats the second day this summer we've seen some. As an aside could I interest you in a rock solid super scheme to put your money into rather than property. Its got a leading politician; an ex Party Leader and Gumint Minister running it- thats probably what the Gumints looking at!

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Originally Posted by minimoke

Apologies - it must be the sun getting too me. Thats the second day this summer we've seen some. As an aside could I interest you in a rock solid super scheme to put your money into rather than property. Its got a leading politician; an ex Party Leader and Gumint Minister running it- thats probably what the Gumints looking at!

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Well I suppoze I tried !!!

The NZ issue with LAQC's & property seems to be similar to the US issue with Limited Partnerships & property back in the '80s.

"Limited partnerships were generally tax motivated. So the Tax Reform Act of 1986, which devastated real estate, was a big factor in running the industry “out of town.”"

Will any changes to the LAQC/property system in NZ have the same effect as what happened in the US? I guess that we will know for sure in a couple of months...

It appears that Martin Hawes shares my thoughts:

Martin Hawes: Depreciation loses lustre
Property investors will rail against the elimination of deductible depreciation but in the long term it may turn out to be a good thing.

Investment 101 says tax should never be a reason for an investment because the rules can change. When depreciation on property is abolished, investors will have to look at the real numbers behind their investments (especially rental yields), not the fake temporary ones that have been produced by tax refunds. That ought to make them more astute investors.

The real problem with residential property is that it is not a good investment - rental income is too low. A tax refund from depreciation may mask that problem, but does not turn a poor investment into a good one.

Martin Hawes bases his investment decisions on yield. So a rental income of 3-5% is not enough for him to judge it as a good investment. However, cash flow (ie weekly or fortnightly rent rather than an annual or six monthly dividend), capital gain and tax issues are also a part of a property investors value calculations. The fact that a dodgy director hiding behind a family trust, cannot take your money is also a consideration.

Interesting to see that Ring Fencing has popped up again a few times in the past few days, as forecasts show that removing depreciation won't provide enough additional tax (because the original forecasts didn't seem to include depreciation clawback on sale of the property). Interestingly, as I was having a bit of a look at this, I note that losses were ring fenced until removed by previous National Govt in 1991.

Yip, it looks like they are serious about plugging the leaks...

English signals tax crackdown
Finance Minister Bill English is signalling a crackdown on high income households that lower their tax bill by diverting income through companies or claiming property tax losses.

Mr English said the May 20 Budget would close these loopholes.

Steve he could do the same with trusts As they do in Aussie. Australian Trusts pay no tax it all has to flow through to beneficaries & maximum tax rates if the benificary is a minor. Plus a few other little quirks if a very low or no income earner

Looks to me that Labour just has to sit tight to see National occupying the Opposition front bench again next term...

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Originally Posted by Steve

The most simplistic change would be to not allow depreciation on rental properties and this may be politically acceptable...

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Imm, just sold one rental property, phew, OZ verus NZ, OZ verus NZ, OZ verus NZ, it's becoming very clear. :D

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Originally Posted by tricha

Imm, just sold one rental property, phew, OZ verus NZ, OZ verus NZ, OZ verus NZ, it's becoming very clear. :D

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Yes, clear to the investors, but clear as mud to Government in power. have posted it elsewhere too, but here is an update:
listings in Waitakere since jan 09 up 27% now
listings in Waitakere since jan 09 up a whopping 52% now (M&D and small landlords)
listings in Manukau since jan 09 up 15% now
listings in Manukau since jan 09 up 30% now (M&D and small landlords)

Confidence down. Let's see what remedies are on offer...

Prescription offered for small fish: Put the money in the bank and go to sleep. The bankers are smart enough to know what to do with your dough....

http://www.landlords.co.nz/read-arti...rticle_id=3685

Prescription offered for big fish: Invest overseas. The way we are going you can forget NZ for the next half century ....

http://www.goodreturns.co.nz/article...-offshore.html

Gee, that's a thumbs-up to the policy makers of the nation. But let me not be too negative. There are some positives occuring. White collar criminals look like they'll begin to see the world more often from behind the bars after all.

So is Mr. Whitehead suggesting that the pool of private landlords be now replaced by increased social housing funded by tax payer dollars (since tax regime has created wrong incentives),
or is he suggesting that private landlords raise rents (because rentals are irrational as an investment currently),
or is the suggestion that property would be justified to crash to make rentals a more profitable investment on revenue yield ratios or to become more affordable to first-home buyers.

http://www.stuff.co.nz/business/3542...acks-tax-plans

Capital like water, follows the path of least resistance. When wealth or people become just numbers, the fact that market dropped by x% appears just as an interesting but painless number ...

A good point to be made in reference to property depreciation allowance compared to other investments.
In the main all other investment items do depreciate do to wear and tear of opertaing the business. Buildings generally do not as they are protected by inflation as well.
Maybe owners should be allowed to depreciate their property but have a compulsory independent valuation every fifth year. If they have overdone the depreciation they should pay back the difference plus a penalty tax. That would give them a message.

If Bill English would telegraph future actions the market would take care of any problems.
As an example the budget could easily get rid of depreciation over more than one year - eg only 2/3 of the current allowance this year and 1/3 next year with a zero level in the third year.
Similarly the LAQC allowances could be removed with advance notice into a future year rather than the current year.
The RB directive that forces banks to source more of their mortgage money from local deposits will have a beneficial effect next year both in restricting lending which will see lending rates rise and much of that rise will end up in the pockets of local individuals on fixed incomes.

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Originally Posted by loofa

A good point to be made in reference to property depreciation allowance compared to other investments.
In the main all other investment items do depreciate do to wear and tear of opertaing the business. Buildings generally do not as they are protected by inflation as well.
.

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Inflation and depreciation are two different things. Buildings certainly depreciate. That is as they age they fall below their replacement costs. Infltion masks this in nominal terms, but it's a very real cost to lanlords.

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Originally Posted by fungus pudding

Inflation and depreciation are two different things. Buildings certainly depreciate. That is as they age they fall below their replacement costs. Infltion masks this in nominal terms, but it's a very real cost to lanlords.

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Absolutely but maintenance expenses are tax deductible as with all businesses. What most businesses contend with is the higher cost of equipment which normally lasts only a limited time and then is obsolete.
Buildings have a much longer lifespan of in excess of 100 years.
Tenants of residential property are often prepared to accept lower standards for less rent or for local convenience/services unrelated to the building.
In the case of non-residential buildings they do become obsolete and get replaced or totally refurbished because the market is less tolerant of poor condition.

Quote:

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Originally Posted by beacon

Yes, clear to the investors, but clear as mud to Government in power. have posted it elsewhere too, but here is an update:
listings in Waitakere since jan 09 up 27% now
listings in Waitakere since jan 09 up a whopping 52% now (M&D and small landlords)
listings in Manukau since jan 09 up 15% now
listings in Manukau since jan 09 up 30% now (M&D and small landlords)

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So we have a big jump in listings, when the Govt regulates -

no depreciation offsets
no offsettings personal income tax losses.

Thats what my accountant reckons is going to happen.

Then property will fall by up to 24%, right or wrong ? As all marginal property investers dump, so lets do the sums.

A $300,000 loan on a rental, that returns $32O A WEEK. $16,640 Year income.

$21,000 interest bill, Rates $2000, Insurance $500, Repairs $1000, loss 0f rent $620. $25,000 outgoing.

A loss of $8,000 a year !!!!!!!!

Either rents need to go up and we know that will not happen.

Or the house price will fall to make it a viable investment.

Quote:

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Originally Posted by tricha

So we have a big jump in listings, when the Govt regulates -

no depreciation offsets
no offsettings personal income tax losses.

Thats what my accountant reckons is going to happen.

Then property will fall by up to 24%, right or wrong ? As all marginal property investers dump, so lets do the sums.

A $300,000 loan on a rental, that returns $32O A WEEK. $16,640 Year income.

$21,000 interest bill, Rates $2000, Insurance $500, Repairs $1000, loss 0f rent $620. $25,000 outgoing.

A loss of $8,000 a year !!!!!!!!

Either rents need to go up and we know that will not happen.

Or the house price will fall to make it a viable investment.

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It's difficult to see losses being ring-fenced. That amounts to taxing someone on money they simply haven't got. Depreciation is different because although it's an expense, it's a non-cash expense. So I reckon they'll wipe or reduce the allowed depreciation and leave it at that. Riing fencing losses iss unworkable without bankrupting many investors, unless they grandfather it.

Quote:

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Originally Posted by fungus pudding

It's difficult to see losses being ring-fenced. That amounts to taxing someone on money they simply haven't got. Depreciation is different because although it's an expense, it's a non-cash expense. So I reckon they'll wipe or reduce the allowed depreciation and leave it at that. Riing fencing losses iss unworkable without bankrupting many investors, unless they grandfather it.

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The FDR regeime is taxing someone on something they may not have got too. People squeeled at the start and now they have adapted to the nusience that it is.

Possibly there needs to be some form of ringfencing as just not allowing depreciation will not generate enough to cover any worthwhile reduction in tax rates. Ringfencing losses is workable, and it won't bankrupt too many investors as they shouldn't have been relying on the marginal tax benefit to make their property investment viable...

Quote:

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Originally Posted by tricha

S
Then property will fall by up to 24%, right or wrong ? As all marginal property investers dump, so lets do the sums.

A $300,000 loan on a rental, ....

A loss of $8,000 a year !!!!!!!!

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I'm restrinign on commenting too much on the likely impacy on tax changes to property unitl I see the actual changes. But at this stage I can't help but feel the governement is acting once the horse has bolted. Sure, in the past prperty owneres did very nicely in a rapidly appreciateing market - and Govt failed to take their cut through Captial Gains Tax then. But thats IRD's problem then - and shouldn't be a problem for owners in the future.

But lets look at your sums - I don't see a 24% decrease. If you have a $300,000k loan your property is probably worth, say 10% more than the loan. Lets say $330,000. With the potetnial tax changes by your sums the owner is up for a $8,000 loss. To avoid the loss the owner puts the property on the market. But what will he sell at. He'll try for $330,000 cos thats what he reckons its worth - but he probably won't get buyers becasue they see teh loss situation. If he sells at $322,000 its break even for the new owner who might chance their arm on making on teh capital gain side. Thats only a 2.4% drop in value - not 24%.

Lets also not put aside potential rises in rents. At some point the see saw will rock to the benifit of owners. If existing owners sell out there will be fewer rentals available for those that will never be able to afford to buy. Few rental matched by incresed demand = higher rentals. There will be political pressure to raise Accomodation Allownces and other tax payer funding to assist low income and vulnerabel people with their rent. So teh tax payer will end up paying higher rents.

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Originally Posted by minimoke

Lets also not put aside potential rises in rents. At some point the see saw will rock to the benifit of owners. If existing owners sell out there will be fewer rentals available for those that will never be able to afford to buy. Few rental matched by incresed demand = higher rentals. There will be political pressure to raise Accomodation Allownces and other tax payer funding to assist low income and vulnerabel people with their rent. So teh tax payer will end up paying higher rents.

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Second that.

Lets also not put aside potential rises in rents. At some point the see saw will rock to the benifit of owners. If existing owners sell out there will be fewer rentals available for those that will never be able to afford to buy. Few rental matched by incresed demand = higher rentals. There will be political pressure to raise Accomodation Allownces and other tax payer funding to assist low income and vulnerabel people with their rent. So teh tax payer will end up paying higher rents.
================================================== =================

Yeah I agree in the fact rents will rise if what tricha accountant is right but enough to make it as good as before the new changes

but also investment properties will fall in value as investors sell down their new liabilities which at one time reduced their personal tax bill to now become an extra cost with only hope of increasing rents an capital value

also for ever seller their has to be a buyer how many renters will be able to get a loan unless prices reduce or their incomes increase-NZ has the second worse income to household debt

Personal

The Budget will be intersting - and so will the consequences. One consequnece is that changes may encourage people who haven't done so already to look at Australia. If you are "forced" to sell your NZ holdings then it might encourage people to move to Australia. They still get the $7,000 cash up front from hte Ozzie taxpayer and for many "first home" buyers there is no stamp duty. And we'll have 15% NZ GST compared with 10% in Oz. It may be that perhasp a more enticing future across the tasman wil be the thing that creates an influx of properties onto the NZ market driving down values. And if people move off shore then there will be less demand for the remining housing. But teh east coast of Oz still has some of the moust expensive3 Housing Affordability globally so that may create the anchor that holds people back in NZ.

The change in rental costs will only be the result of net demand. Every rental sold up will either be occupied by a new renter or by an owner-occupier who may have been a renter.
So no net change there.
Migration will have an effect. More going to Oz (lower unemployment there) will reduce demand.
Lower immigration from UK (the lower pound) or net flow from Asia may have an effect.
The major influence has to come from income changes (wages or welfare).
Low or nil wage rises mean that landlords have to bite the bullet on rents.
Every other reason for change in rents is minor compared to the ability to pay that rent.

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Originally Posted by loofa

landlords have to bite the bullet on rents.

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Recent Data on real rents suggests they have already been biting the bullet for the last 3 years. Maybe its time they start biting themselves, as flesh is currently the cheapest commodity around, and I suspect they haven't got the firepower left to buy any more bullets ...

I feel the housing market in general is going to have to do more bullet bitting, including landlords.
It is obvious that NZ'ers love affair with rental housing has got to be reined in. Too much money has/is going
into a non productive inefficent sector. Govt has got to redirect NZ'ers mind sets into "productive, saving
type ventures". There will be a retune in the rentable establishments, away from the single dewlling toward
flatting complexes. Single dwellings are no longer cost effective as there are allready better investments and
Billy Smurf (and others) will keep it like that.
Ring fencing ??? yes
Capitial gains in the future ?... watch this space
Landtax.... yes, most probably aimed more at the residential sector (empty sections)
All too hard to administer ???.... Bullsh*t
It will not all happen o/night, But will be slowley introduced.
Govt spin doctors will slowly ramp up after May.
I often wonder why a tax break is not offered to various type of saving accounts
i.e. Bank deposits, debentures, coy notes etc etc...

BB

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Originally Posted by Billy Boy

I often wonder why a tax break is not offered to various type of saving accounts
i.e. Bank deposits, debentures, coy notes etc etc...

BB

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Simply because it's income, and if you exempt one form of income then you've sure opened the floodgates. There's no reason to do that with earnings from interest rates anymore than there is for wages for pouring gas.

Well my index of rental property has hit a low which contradicts all the negativity about property investment. My index is "the number of 2 bedroom apartments available to rent in mt eden as advertised on trademe". Today it is down to three and only two of them are available right now. Of the hundreds of these apartments in the suburb the supply and demand are almost equally matched, the closest I have seen for a long time. This usually means rents will increase....

Quote:

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Originally Posted by fungus pudding

Simply because it's income, and if you exempt one form of income then you've sure opened the floodgates. There's no reason to do that with earnings from interest rates anymore than there is for wages for pouring gas.

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Yes I see your point
But Govnt's can do what they like, how they like, and if they want people so save (and they do) then give
the plebs a chance to save by making it worth their while. Kiwi saver ??? and the strings attached. .... well ??
BB

Quote:

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Originally Posted by Billy Boy

I often wonder why a tax break is not offered to various type of saving accounts
i.e. Bank deposits, debentures, coy notes etc etc...

BB

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That you will not get.
But the new emphasis that the Reserve Bank is forcing on to the lenders will help out.
By increasing the percentage of funds that must be raised in NZ rather than from Japanese housewives pressure is on to raise deposit interest rates.
You may still pay tax but on a larger income.

Further into the future I wonder if Basel III will force the bank lending ratios to move against lending on housing and thus make houses cheaper by reducing speculative investments for capital gain because mortgage money will be restricted.

Quote:

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Originally Posted by loofa

Further into the future I wonder if Basel III will force the bank lending ratios to move against lending on housing and thus make houses cheaper by reducing speculative investments for capital gain because mortgage money will be restricted.

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I have given some thought too this aspect as well.
I think it could come about, but will it come about quick enough coz of the politicial aspect.
It appears to me the our average "Polly of today" is more interested in keeping his/her arse in a behive seat than serving the greater good of NZ. One could blame MMP and argue that FPP should return as it allows for the hard decisions to be made as and when needed.
BB

Quote:

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Originally Posted by Billy Boy

I often wonder why a tax break is not offered to various type of saving accounts
i.e. Bank deposits, debentures, coy notes etc etc...

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PIE's for high income earners are a tax break.

My view: while technically rentals have no tax advantage to other investments, structurally they do due to high debt and deprecation. The real issue is the alternative. People dont understand shares. People thought they understood fixed interest but how much money has been lost there.

I hoe the government doesn't disincentivise the one investment normal people can do well at and push them into investments they will do worse at. peopel will move into managed funds and we all know they are not the best investment

Quote:

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Originally Posted by Steve

The FDR regeime is taxing someone on something they may not have got too. People squeeled at the start and now they have adapted to the nusience that it is.

Possibly there needs to be some form of ringfencing as just not allowing depreciation will not generate enough to cover any worthwhile reduction in tax rates. Ringfencing losses is workable, and it won't bankrupt too many investors as they shouldn't have been relying on the marginal tax benefit to make their property investment viable...

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Not so. Ringfencing is like taxing the grocer for the proofit he makes on cabbages while ignoring what he loses on lettuces. It's simply not the way the world or any accounting system works.

Quote:

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Originally Posted by fungus pudding

Not so. Ringfencing is like taxing the grocer for the proofit he makes on cabbages while ignoring what he loses on lettuces. It's simply not the way the world or any accounting system works.

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Hmmmm ....But, How else does one acheive the needs in our case ???
With due respect "any accounting system".... accountants do not have the finial say, bless them.
To much borrowing for the wrong reasons is our problem. eg 18yr old s with 20K on their credit cards.
Buying houses for spec purposes or cap gains only... etc
Cheers BB:)

Quote:

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Originally Posted by Billy Boy

Hmmmm ....But, How else does one acheive the needs in our case ???

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What needs are they? This nonsense flares up every time there is a property boom. It was rife in the Rowling/Muldoon era, and always forgotten when the inevitable crash comes. The current income tax laws are sufficient to clobber those who buy for profit on resale as opposed to investors. Trouble is the IRD gave up enforcing the rules a couple of decades back. No change is needed- the answer is already there.

Quote:

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Originally Posted by CJ

PIE's for high income earners are a tax break.

My view: while technically rentals have no tax advantage to other investments, structurally they do due to high debt and deprecation. The real issue is the alternative. People dont understand shares. People thought they understood fixed interest but how much money has been lost there.

I hoe the government doesn't disincentivise the one investment normal people can do well at and push them into investments they will do worse at. peopel will move into managed funds and we all know they are not the best investment

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I agree,
Aways back I tried to have better financial education introduced (especially shares etc) at high school level. The educators just would not consider the idea. Wonder why ? :(
BB:)

Quote:

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Originally Posted by fungus pudding

What needs are they? This nonsense flares up every time there is a property boom. It was rife in the Rowling/Muldoon era, and always forgotten when the inevitable crash comes. The current income tax laws are sufficient to clobber those who buy for profit on resale as opposed to investors. Trouble is the IRD gave up enforcing the rules a couple of decades back. No change is needed- the answer is already there.

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"What needs are they" - We gotta stop so much borrowing from O/seas for the wrong reasons.
"Trouble is the IRD gave up enforcing the rules a couple of decades back." --Yep !!
So why wont Billy Smurf start swinging the big boot at the IRD.? --- Politics !!!
There again maybe after the Budget ??? who knows.
I do not wear the argument "Too hard to administer"
BB:)
PS I was a young player in the property market in Wgton until Bill Rowlings put the skids under me/us, Bob jones was right miffed.

Quote:

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Originally Posted by Billy Boy

I agree,
Aways back I tried to have better financial education introduced (especially shares etc) at high school level. The educators just would not consider the idea. Wonder why ? :(
BB:)

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Yeah just image if instead of the TV programs -Property ladder,home impovements,Locations they had one's to do with the Sharemarket LOL

-We really are a nation of Property sheep

By the way Fungus
What bill Rowling did back in the 70's with his cap gain tax over 2 yrs.
Was'nt that a type of ring fencing ??
BB

Quote:

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Originally Posted by JBmurc

Yeah just image if instead of the TV programs -Property ladder,home impovements,Locations they had one's to do with the Sharemarket LOL

-We really are a nation of Property sheep

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In the intersts of balanced TV it loks like the finance secotor is gettign its own show in the guise of a Conman show on one of the channels.

Quote:

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Originally Posted by Billy Boy

By the way Fungus
What bill Rowling did back in the 70's with his cap gain tax over 2 yrs.
Was'nt that a type of ring fencing ??
BB

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Not at all. Profits on sale within the first ten years were taxed on a decreasing scale starting at 90% for sales in the first six months. This was added to income and taxed at the appropriate rate, so it wasn't a cap. gain tax. Rather it was income tax applied to the capital gained - an important difference.
Rng fencing is quite different. If an investor loses 75,000 on property investmentds but makes 75,000 at his normal trade then under ring fencing he will be taxed on 75,000 although his earnings will be nil. Remeber these will be cash losses (depreciation is a non-cash expense, but if that is gone and ring fencing applies, then that scenario is quite possible) That is why it's a very harsh tax and will bankrupt some investors.
Back to Wallace Rowling's tax. It was at a time like the last few years when property was rapidly increasing. - over 20% annually. (It was great fun) Both parties waffled on about it as though it would never stop. They simply don't seem to realise that booms are simply a market correction, investors over-react and busts will follow. IOW words they come right without regulation and dopey schemes. Wallace's nonsense dried up listings - people stopped selling - and just as the heat was dying down, the market flared up agaain. Exactly the opposite of what was intended. (Dear Wallace - I am greatly indebted to you wherever you are - you gave me a wonderful start))

Becoming increasingly clearer where property investors are welcome... unless NZ at least postpones its current fetish to get a "fair share of tax".
"Fair" by standards that are looking increasingly debatable by the day ...

http://www.businessspectator.com.au/...ocument&src=ea

Aussies are crazy as ever. While Rudd seems to still have a good sense of timing (with his mining tax) as well as postponing Henry Tax recommendations pertaining to fine tuning tax in the current environment, Glen seems to have lost the plot altogether. Hope RBNZ is more circumspect...

National seems to not want to learn anything from the Aussies (funny how they keep talking about catchup, yet seem hellbent on doing the opposite by squeezing the property market) ...

There is a chance that depreciation on buildings will be not be disallowed, come end of May.

Last minute bets called ! Tomorrow's the day when we might all be fighting for roof space on the tallest building in town. Or maybe not. I somehow think whatever they do won't be too harsh; the sun will almost certainly rise on Friday morning. Perhaps disallow depreciation on residential, and set a flat rate of depreciation on commercial and industrial. But a lower and flatter income tax rate will be most welcome.

BNZ wants OCR up, regardless of global events, citing local economy strength.
"There was a view the economy was going from strength to strength, but that was based on confidence and other surveys, rather than real economic figures." from the following.

http://www.stuff.co.nz/business/indu...agile-recovery

"But lending growth has been very soft and private sector credit sector growth was practically zero last month. That suggests the economy has not really started to heal yet," Mr Eaqub said.

As well as the prospect of higher official interest rates in the coming year, the Government would be trying to reduce its operating deficit.

"Together those two things will be sucking resources out of the economy and leaning against growth," he said. As well, the net migration gain would slow down as more people left for Australia.

NZIER has said hold the interest rates. I agree.

Small business drives a lot of growth in this country and while recovery is happening it is painfully slow. Look at all the small offices and factories still for lease. Until vacancy rates fall this shows that small business does not have the confidence to take on a new lease.
Secondly, mortgageee sales are still high. I believe this is the tip of the debt iceberg. Owners of small businesses often borrow against their private homes to stay afloat. There are many out there wrestling with paying mortgages to keep their businesses afloat. If interest rates go up, quite a few will hand their house keys to the bank and walk away. I say leave interest rate increases till September.

Quote:

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Originally Posted by fungus pudding

Last minute bets called ! Tomorrow's the day when we might all be fighting for roof space on the tallest building in town. Or maybe not. I somehow think whatever they do won't be too harsh; the sun will almost certainly rise on Friday morning. Perhaps disallow depreciation on residential, and set a flat rate of depreciation on commercial and industrial. But a lower and flatter income tax rate will be most welcome.

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Well I wasn't too far out. Income tax is lower and flatter. Res depreciation has been clobbered, which acheives next to nothing, because most 'investors' are really traders who sell after a few years and pay at that time on deprciation recovered. That was simply a move to appease the rabble who constantly brey about landlords not paying tax. commercial and industrail still are allowed claims on fixtures and fittings. Overall it's not bad, but there will be some landlords who have to sell down - those who are highly geared and not generating a decent income.
Anyone notice any change in demand or listings for res. investment in their area?

fungus pudding
how do you account for the improvement in LPT recently?

Quote:

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Originally Posted by voltage

fungus pudding
how do you account for the improvement in LPT recently?

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I think they are still underpriced so a better question might be, why did they drop so much? It doesn't make sense to me except with the threat of disallowing depreciation and some having to reduce gearing - I suppose just general negative sentiment, and it might be turning around now that it's obvious commercial property isn't going to collapse. It's a bit of a puzzle, and I keep comparing them to buying a property, e.g. a buyer purchasing say 500k worth and keeping them as a building buyer does, but sharemarket players are different animals. Commercai property owners think ten years is a short term investment. Many sharebuyers think 6 months is a lifetime. I bought up a few because they compared very favourably with buying a building, or at least the income did, particularly as they are all PIEs. So the future? Who knows - but I do see them as a bargain.