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troyvdh
31-12-2009, 06:32 PM
Rental properties...the NZ Treasury have stated that by removing tax incentives for rental property owners will result in rent increase's....now if that is not the most profound understatment of the century...please let me know.;...this lot must be the biggest despository of Mensa minds in the world...

PS ..and bye the way who else will be fronting up to provide rental properties....councils...govt....

fungus pudding
31-12-2009, 07:22 PM
Rental properties...the NZ Treasury have stated that by removing tax incentives for rental property owners will result in rent increase's....now if that is not the most profound understatment of the century...please let me know.;...this lot must be the biggest despository of Mensa minds in the world...

PS ..and bye the way who else will be fronting up to provide rental properties....councils...govt....

There are no tax incentives applying to real estate that do not apply to any other investmernt or business. The thing that sets rent levels is supply and demand. Nothing else. If treasury does anything at all to discourage real estate investment - guess who will buy the properties then? How right you are - the potential tenants. That will lower dewand in equal numbers to lowered supply.

Wilkins_Micawber
31-12-2009, 07:45 PM
There are no tax incentives applying to real estate that do not apply to any other investmernt or business.

What about the tax incentive of being able to claim depreciation on an appreciating asset? As well as being able claim Repairs & Maintenance to ensure it does not depreciate. The tax incentives applying to residential property investment are (IMHO) like a long term share investor being able to claim depreciation each year on share investments (and being able to offset that agianst other income/earnings) AND not having to pay capital gains tax on selling the shares.

Penfold
31-12-2009, 08:14 PM
The Treasury discussion has been fascinating.... A change in the way property investment is taxed will have all sorts of repercussions. Lets hope that ultimately any changes made will result in more productive investment; more equitable taxation; more sustainable building; and a minimum of financial hardship for tenants.

It is interesting that property prices are likely to rise too under some scenarios. If rent increases people like me that choose to rent, will likely buy and put pressure on house prices.

All I really hope is that something happens to deter property investment, and NZ becomes a more prosperous/financially savvy country.

fungus pudding
31-12-2009, 09:24 PM
What about the tax incentive of being able to claim depreciation on an appreciating asset?



Building materials do depreciate. Land may appreciate, but depreciation claim does not involve land. Improvements may appear to appreciate but that is because money is depreciating in value. But rest assured improvements steadily reduce in terms of their replacement cost.

AMR
01-01-2010, 01:14 AM
The ball does not lie in the central government's hands, but rather John Banks/Len Brown.

The councils are responsible for limiting the amount of land available, and then by making it uneconomical for developers to increase population densities by applying excessive development contributions.

bohemian
01-01-2010, 07:02 PM
What about the tax incentive of being able to claim depreciation on an appreciating asset? As well as being able claim Repairs & Maintenance to ensure it does not depreciate. The tax incentives applying to residential property investment are (IMHO) like a long term share investor being able to claim depreciation each year on share investments (and being able to offset that agianst other income/earnings) AND not having to pay capital gains tax on selling the shares.Depreciation of building and chattles is a real expense. Replacing carpets, bloody bathrooms and Kitchens costs us a fortune. The tax deductiblilty is legimate.

Wilkins_Micawber
01-01-2010, 07:11 PM
Depreciation of building and chattles is a real expense. Replacing carpets, bloody bathrooms and Kitchens costs us a fortune. The tax deductiblilty is legimate.

But you have it both ways - you deduct the expense of the repairs AND claim depreciation on the items being repaired. I only disagree with the ability to claim depreciation on the buildings as they do not really depreciate (providing that normal repairs and maintenance are carried out).

fungus pudding
01-01-2010, 08:50 PM
But you have it both ways - you deduct the expense of the repairs AND claim depreciation on the items being repaired. I only disagree with the ability to claim depreciation on the buildings as they do not really depreciate (providing that normal repairs and maintenance are carried out).

Of couse they depreciate. Name one compnent, roofing material, timber paint, plumbing, wiring - that doesn't depreciate.
Ask yourself whether you would pay more for a 20 year old building, or a brand new one, built next door on a comparable site, using the same plans and materials - an exact replica. Or to put it another way - every day of a building's life it moves further below its replacement cost. That is depreciation.

Wilkins_Micawber
02-01-2010, 09:04 AM
Of couse they depreciate. Name one compnent, roofing material, timber paint, plumbing, wiring - that doesn't depreciate.
Ask yourself whether you would pay more for a 20 year old building, or a brand new one, built next door on a comparable site, using the same plans and materials - an exact replica. Or to put it another way - every day of a building's life it moves further below its replacement cost. That is depreciation.

Fair comment - I guess I am thinking from the view point of value. Buy a house today and sell it in 20 years and I would be willing to bet that the value of the house is more (not less) than it was when it was bought. To me that is an a-ppreciating (not de-preciating) asset (esp if it appreciates by more that the CPI).

Jess9
02-01-2010, 10:01 AM
Interesting point, but as noted above the real test is how much it costs to replace the old house, not what you would get for it if sold as is. The difference from your past cost in the latter is inflation, and the imbalance of demand over supply. More noticeable in dollar terms over a extended period of time.

Mark Weldon was very negative on property investment and use of LAQC's in the paper the other day. Don't see the problem myself. Depreciation is claimed by all businesses. Its just more noticeable for providers of rental property as this is a big part of the cost of provision of accommodation - for obvious reasons.

His beef was with offsets against salary and wages for tax purposes. I guess he wants the wage and salary tax base as extensive as possible so that the government can afford to reduce coy tax rates?? It all boils down to an allocation bun fight and guess who always wins. A fine example of Financial Darwinisiam ; )

macduffy
02-01-2010, 11:09 AM
Yes, there's no problem with off-setting depreciation against the income of a business.

It's when it's off-set against other income, particularly wages and salaries that the distorting effect cuts in with property investment getting an advantage over other forms of investment. Not surprising that Kiwis favour buying rental properties over equity investments.

Jess9
02-01-2010, 11:17 AM
You could use the LAQC for "other forms of investment" if deemed suitable too. LAQC is not limited to property of course. LAQC is not even needed to xfer losses. Operate as a sole trader (in your own name) for example. Issue then is asset protection. Only advantage of LAQC IMO is bonus of asset protection, i.e. you can transfer shares in coy at little cost/hassle when/if circumstances require a ownership change. Negative is additional compliance/cost requirements of operating a valid coy.

foodee
02-01-2010, 11:27 AM
Yes, there's no problem with off-setting depreciation against the income of a business.

It's when it's off-set against other income, particularly wages and salaries that the distorting effect cuts in with property investment getting an advantage over other forms of investment. Not surprising that Kiwis favour buying rental properties over equity investments.

Regarding depreciation, the IRD utilises "claw-back" where it is
applicable. I think it is a bit of a "timebomb" especially if your tax rate
has gone up at the time of sale!

Happy New Year to all - off to Salmon fishing for a couple of
months.:D

Cheers

fungus pudding
02-01-2010, 11:41 AM
Regarding depreciation, the IRD utilises "claw-back" where it is
applicable. I think it is a bit of a "timebomb" especially if your tax rate
has gone up at the time of sale!

Happy New Year to all - off to Salmon fishing for a couple of
months.:D

Cheers

It's not a time bomb. It's always a benefit because it defers taX. It features in your profit/loss calculation as an expense but it is a non cash expense, and anyway is only payable if the depreciation claimed is recovered on sale. Remember that it is so ofen the land price that has gained or appreciated. Numerous sales result in depeciation not being recovered, or only partly recovered.

Jess9
02-01-2010, 11:54 AM
If you transfer shares in a LAQC (holding property) you don't trigger the claw back.

troyvdh
02-01-2010, 12:08 PM
...when i started investing in rentals 30 + years ago...I had never heard of a LAQC....I new there were a few advantages like leverage and capital gains...but the main reason for investing in houses was because i did not trust ...blokes in suits...like brokers,money managers,advisers,R Jones and his ilk....in fact thats what really peeves me off ..the "powers that be" have been screaming at us to forget rentals and invest in business's etc....but to a great extent how have the likes of doug-somers,watson,hotchin,feltex,bridgecorp,dnz et al have all been permitted to flourish and end the investing career.s of so many...I believe that regulations about disclosure,related party borrowings and the like have never been stingent enough to convince folk to change there views.
Mr Weldon may well think the market is distorted...he still is a young chap...and lastly I believe that this whole debate has arisen as more and more NZ ers focus on investment strategies and tax implications.
30 years ago i cannot recall if investment entities were established solely for the purposes of tax minimsation/avoidance...like trinity,LAQC and the like....

bohemian
02-01-2010, 06:42 PM
But you have it both ways - you deduct the expense of the repairs AND claim depreciation on the items being repaired. I only disagree with the ability to claim depreciation on the buildings as they do not really depreciate (providing that normal repairs and maintenance are carried out).I am not sure where you are comming from, but if you replace a kitchen bench, this is a capital item to be depreciated and not an expense to be claimed against your taxable income.

Jim
03-01-2010, 09:32 PM
Invest in business like PGW ? PGC ? or SKL ? or FTX ??? Or would rather buy a rental and sit tight regardless ?
I bought a rental for 140k 10 yrs ago and it's RV is 300k, I bought another one for 340k 3 yrs ago and its RV is 380k. The rents are $300 and $340 a week.
I bought PGW at $2, worth $0.58; PGW $2.50 worth $0.48; SKL $1.15 worth $0.51 and FTX $0.70 worth $0.000.
You be the judge which better business or brick and mortar.

nztx
04-01-2010, 10:49 AM
Interesting point, but as noted above the real test is how much it costs to replace the old house, not what you would get for it if sold as is. The difference from your past cost in the latter is inflation, and the imbalance of demand over supply. More noticeable in dollar terms over a extended period of time.

Mark Weldon was very negative on property investment and use of LAQC's in the paper the other day. Don't see the problem myself. Depreciation is claimed by all businesses. Its just more noticeable for providers of rental property as this is a big part of the cost of provision of accommodation - for obvious reasons.

His beef was with offsets against salary and wages for tax purposes. I guess he wants the wage and salary tax base as extensive as possible so that the government can afford to reduce coy tax rates?? It all boils down to an allocation bun fight and guess who always wins. A fine example of Financial Darwinisiam ; )


Obviously no-one's told Mark that some of the good folk might be investing their EOY tax wefunds after the LAQC losses get deducted, into NZX companies thus helping to pay his CEO Salary ;)

Perhaps he might like to work a bit harder this year on getting an increased variety of offerings on the board, so the good folk dont get so tempted to look at more bricks & mortar after seeing the limited and shrinking range of tasty morsels on offer on the NZX menu ;)

fungus pudding
04-01-2010, 11:30 AM
Invest in business like PGW ? PGC ? or SKL ? or FTX ??? Or would rather buy a rental and sit tight regardless ?
I bought a rental for 140k 10 yrs ago and it's RV is 300k, I bought another one for 340k 3 yrs ago and its RV is 380k. The rents are $300 and $340 a week.
I bought PGW at $2, worth $0.58; PGW $2.50 worth $0.48; SKL $1.15 worth $0.51 and FTX $0.70 worth $0.000.
You be the judge which better business or brick and mortar.

If your latest purchase is worth 380,000 there could be a gain of 40k. That's fine as long as your losses don't exceed that, but an income of 17k against 340k is an extremely low return. Add rates, insurance and maintenance and I'm sure you'll find you've bought the capital gain. You've possibly gained 13k a year, but almost certainly propped it up by more than that. Still - good compulsory saving.

Dubdee
11-01-2010, 09:53 AM
The use of an LAQC does not show very much advantage over holding assets in your personal name. Whilst an LAQC offers the illusion of limited liability, the fact is on property, the major creditor of the LAQC is the mortgagee who of course requires a personal guaranteefrom the shareholders.

The simplist thing for govt to do (as per Muldoon on special partnerships) is to quarantine the tax losses from property.

As a financial planner I wrote a paper for my Uni on why property was a preferred NZ investment habitat. It was not just tax but a combo of other things like low price volatility, low market noise, ability to add value through sweat labour, ease of leveraging, direct control of asset, easy to understand sector.

I hold all sorts of assets but I would have to say proerty is the one that taxes my emotions least. Shares are very voltaile all sorts of director clowns trash value and I dont have some pundit telling me each night how stupid I have been. I take a very long term view. I have yet to be convinced thats its a great performer but my study of Tauranga over 2 decades suggested performance was right up there over the longer term.

Also the existance of a CG tax wont solve the asset allocation problem. What we need is good performance on the other asset classes rather try to tax property back to the mediaocre performance of the others.Have a look at UK and Australia of which have CG and other property related taxes.

Arbitrage
11-01-2010, 10:16 AM
Good comments Dubdee.
Your uni paper has pressed the right buttons. With over 20 years of property investment I have found it to be the best asset class for wealth creation and a preference because of the reasons you listed. Even the lack of liquidity can be overcome through revolving credit secured against property. However let's not get into the shares vs property arguments again.

Dubdee
11-01-2010, 12:50 PM
I have spent considerable time quizzing my tax accountant on the distinction between capital improvement and repairs on property. In addition to giving me his view he also provided the key case law.

If the work repairs the property back to maintain current income its an expense. I would argue the kitchen bench example is a repair as it is necessary to maintain current rental income. Its okay to replace old technolgy with new, provided same functionality is maintained.

Its capitalised if it improves the income capacity of the property, like adding a deck or new ensuite.

fungus pudding
11-01-2010, 01:18 PM
I have spent considerable time quizzing my tax accountant on the distinction between capital improvement and repairs on property. In addition to giving me his view he also provided the key case law.

If the work repairs the property back to maintain current income its an expense. I would argue the kitchen bench example is a repair as it is necessary to maintain current rental income. Its okay to replace old technolgy with new, provided same functionality is maintained.

Its capitalised if it improves the income capacity of the property, like adding a deck or new ensuite.

It is far from that simple, and a lot depends on length of ownership. For instance if you buy a property and six months later reroof it; the IRD will almost certainly rule this as a capital expense that would have been calculated into the price paid by the buyer. So the property was purchased at a discount and the new roof simply adds to the capital. However if you reroof a propeerty after twenty years of ownership you are far more likely to get away with claiming it as R and M. In general the same applies to a kitchen bench. But while there are guidelines, firm hard and fast answers aren't easily obtained. Caution, and dare I say a little imagination, in the way your accounts are written out will help. The word 'repair' looks better than 'replace', and a large bill for plumbing work looks better if the new bench and joinery isn't precisely itemised. But don't push you luck too far with that sort of thing. .

Dubdee
11-01-2010, 04:25 PM
It is far from that simple, and a lot depends on length of ownership. For instance if you buy a property and six months later reroof it; the IRD will almost certainly rule this as a capital expense that would have been calculated into the price paid by the buyer. So the property was purchased at a discount and the new roof simply adds to the capital. However if you reroof a propeerty after twenty years of ownership you are far more likely to get away with claiming it as R and M. In general the same applies to a kitchen bench. But while there are guidelines, firm hard and fast answers aren't easily obtained. Caution, and dare I say a little imagination, in the way your accounts are written out will help. The word 'repair' looks better than 'replace', and a large bill for plumbing work looks better if the new bench and joinery isn't precisely itemised. But don't push you luck too far with that sort of thing. .

I agree that any work done witin 6 months or so of purchase needs to be capitalised under the concept I think delapidation.

Also another trick for players in property is deemed depreciation. If you have an investment property and not formally elected not to depreciate it, then the IRD will deem that a depreciation clawback will be applied to the sale proceeds not withstanding that no depreciation was ever claimed. So for tax purpose you must claim depreciation or formally notify IRD of your decision not to do so.

underground
12-01-2010, 06:03 PM
some sections under subpart EE of the Income Tax Act actually over-ride the capital limitation of DA1.. for example assets bought on capital account can be depreciated by 100% in the year of acquisition if the value is 500 or less..

and as dubdee says their needs to be a nexus between income and expenditure in order for expenses to be deductible. however you can have apportionment as well.. (Banks v CIR) the IRD's Tax Information Bulletin (May 1994) also states that you can deduct 50% of your home telephone line rental if you run a business from home..the average landlord should be able to claim this.

the IRD has many anti-avoidance provisions at its disposal under the income tax act and the tax administration act.

LAQC's will not last very long, the IRD will soon get rid of them as its confusing for overseas investors, the introduction of the Limited Partnershps Act (2008) will be the sexy new investment vehicle of choice.

i believe equities beat property hands down if you indexed the gains on a diversified portfolio of the NZX15 over the long run, but each to their own

fungus pudding
12-01-2010, 06:38 PM
I agree that any work done witin 6 months or so of purchase needs to be capitalised under the concept I think delapidation.

Also another trick for players in property is deemed depreciation. If you have an investment property and not formally elected not to depreciate it, then the IRD will deem that a depreciation clawback will be applied to the sale proceeds not withstanding that no depreciation was ever claimed. So for tax purpose you must claim depreciation or formally notify IRD of your decision not to do so.

I've never heard of that and don't understand it. On a sale tax is paid on depreciation that has been claimed, but then recovered; so it's hard to imagine how any tax could be calculated when no claim was made and therefore nothing recovered. I think you've got something a bit haywire there.
My concern with not claiming depreciation is that it almost amounts to an admission that the purpose in buying the property is to resell it. Remember it's intent that exempts the deal from forming taxable income. Anyway it's ridiculous to pay tax rather than use the legitimate option of deferring it.

fungus pudding
12-01-2010, 06:43 PM
some sections under subpart EE of the Income Tax Act actually over-ride the capital limitation of DA1.. for example assets bought on capital account can be depreciated by 100% in the year of acquisition if the value is 500 or less..

and as dubdee says their needs to be a nexus between income and expenditure in order for expenses to be deductible. however you can have apportionment as well.. (Banks v CIR) the IRD's Tax Information Bulletin (May 1994) also states that you can deduct 50% of your home telephone line rental if you run a business from home..the average landlord should be able to claim this.



Not that simple. Being a landlord is ]NOT[/U] a business in the eyes of the IRD.

macduffy
12-01-2010, 06:49 PM
Here's a silly question but shouldn't this thread appear under "Property Investment" not "NZX"?

:confused:

Steve
12-01-2010, 07:25 PM
I've never heard of that and don't understand it. On a sale tax is paid on depreciation that has been claimed, but then recovered; so it's hard to imagine how any tax could be calculated when no claim was made and therefore nothing recovered. I think you've got something a bit haywire there.

I have heard of this and it is stated in various IRD publications, but have never heard of an example of the IRD enforcing the point where no 'application not to depreciate' has been filed.

Steve
12-01-2010, 07:31 PM
Not that simple. Being a landlord is ]NOT[/U] a business in the eyes of the IRD.

That's correct, the IRD 'expectation' is that you have multiple properties in order to be in the 'business'. Having a single property is not deemed to be 'in business'...

fungus pudding
12-01-2010, 08:28 PM
That's correct, the IRD 'expectation' is that you have multiple properties in order to be in the 'business'. Having a single property is not deemed to be 'in business'...

That still doesn't qualify. The IRD do not recognise renting residential property as being in business.

underground
12-01-2010, 08:48 PM
well it depends on the circumstances..it can never be one size fits all. the act is not clear on the definition of business so it is subject to case law. the IRD will apply whats known as the business reality test which holds legal precedent in NZ, which is defined in the case of [Grieve v Comissioner of Inland Revenue] for anyone that is interested...but for the purpose of deductions all that is needed is a nexus between income and expenditure which exists in rental properties.

this was the concept as understood by Craig Eliffe who is the Professor of Tax at the University of Auckland, former partner KPMG and a current partner of Chapman Tripp, hope this helps.

fungus pudding
13-01-2010, 07:10 AM
I've never heard of that and don't understand it. On a sale tax is paid on depreciation that has been claimed, but then recovered; so it's hard to imagine how any tax could be calculated when no claim was made and therefore nothing recovered. I think you've got something a bit haywire there.


Just had a look through IRD rules, and you are right - I'm wrong :o Been a long time since I've been involved in residential rentals, preferring commercial stuff these days, but it looks like a few policies heve changed. I presume thesame applies to commercial/industrial, although I can't imagine anyone with commecial investments waving their depreciation claim. Seems an illogical ruling, but it's there alright.