What change will we see to property taxation?

[CJ]

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.

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.

[fungus pudding]

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.

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.

[minimoke]

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

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!)

[fungus pudding]

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

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.

[minimoke]

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

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.

[beacon]

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.

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).

[Arbitrage]

Looks like depreciation will be the only change.

[777]

Looks like depreciation will be the only change.

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.