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  1. #21
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    Quote Originally Posted by fungus pudding View Post
    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.
    Last edited by minimoke; 22-01-2010 at 04:16 PM.

  2. #22
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    Quote Originally Posted by minimoke View Post
    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).

  3. #23
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    Looks like depreciation will be the only change.

  4. #24
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    Quote Originally Posted by Arbitrage View Post
    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.

  5. #25
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    Quote Originally Posted by 777 View Post
    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.
    I agree. This seems an obvious move and would be in line with JK's comments today.

  6. #26
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    Quote Originally Posted by macduffy View Post
    I agree. This seems an obvious move and would be in line with JK's comments today.
    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.

  7. #27
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    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 ...

  8. #28
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    Quote Originally Posted by 777 View Post
    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.
    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.

  9. #29
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    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.

  10. #30
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    Quote Originally Posted by 777 View Post
    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.
    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...
    Last edited by beacon; 10-02-2010 at 09:53 AM.

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