Property investors worry ring-fencing law 'pulls rug out from under them'

Friday, 7 December 2018

Prices have risen fastest in regional New Zealand.

Investors say they should be given more time to adjust to changes that will limit their ability to claim tax breaks.

A bill that will introduce ring-fencing of tax losses for rental properties has been introduced to Parliament and is likely to get its first reading on December 12.

It means investors who run a property at a loss will not be able to claim that against their other income.

At the moment, if a rental property costs more a year to own than it provides in rent, you can use the difference to reduce your other income.

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For example, if you had a loss of $10,000 you could reduce your salary from $75,000 to $65,000 and pay less tax on it as a result.

Many landlords use this as a way to help them hold properties long enough to benefit from capital gains, particularly when house prices are high compared to rents.

Nick Gentle says the fact the change isn't phased in could be a problem.

But the bill would instead require that the losses were only claimed against future rental property income.

The default will be for losses to be ringfenced within an investor's property portfolio but they can opt to do it on a property-by-property basis instead.

The change would be introduced in the 2019/2020 tax year, rather than being staggered or phased in over a couple of years.

Investor Nick Gentle, who also operates property finding agency iFindProperty, said that was a problem.

'For whatever reason a lot of investors have negatively geared real estate. They've just had the rug pulled out from underneath them. With gradual rent increases and five years to put extra money into the mortgages, many people would have been able to make it work.

'Now they are faced with sell or suffer. Sure, exchanging tenants for home buyers means at a numerical level people still have a house so it kind of nets out but that's statistics. At an individual level, tenants and their family no longer have a home and oops, there aren't rentals any more in the leafy safe suburbs close to the schools they've always gone to.'

He expected to see investors selling up in pricier areas and using the money to buy cheaper houses, where the rent would go further to cover the cost of ownership.

'Which will push up prices in the regions more.'

Matt Gilligan, of property accountancy firm Gilligan Rowe and Associates and an investor himself, said the tax was 'socially regressive'.

'If interest rates increase in the future, which they always do, it will have little impact on those with low loan-to-value ratios (LVRs) and those with high incomes, who will have the cash flow to manage. On the other hand, those with lower incomes and higher LVRs will surely be served up as insolvent dishes to people in better financial positions as they struggle to cope with spikes in rates and lose the ability to get tax relief from such fluctuations because of ring-fencing.'

Revenue Minister Stuart Nash said it was an issue of fairness.

'In conjunction with the extension to the bright-line test, ring-fencing losses from rental properties would make property speculation less attractive and level the playing field between property investors and home buyers. The new rules will not apply to a person's main home or a property that is rented out and used privately such as a bach.'

Real Estate Institute chief executive Bindi Norwell said she was concerned about the impact of the change.

'We consider restricting the use of rental losses for investors could negatively influence the rental market, either by investment property owners passing on the cost of the reduced benefits to renters through increased rental prices or making rental ownership a less appealing investment choice. This may lead to a reduction in rental properties, thereby increasing pressure on the rental market and driving up rental prices,' she said.

The Government is making property investment a less appealing proposition.

'This is particularly undesirable in the current environment whereby home ownership is at its lowest level in 60 years and the number of people living in rental accommodation is increasing at a greater rate than those living in their own homes.'

Another investor, Lily Leung, said the government should look at its own backyard before attacking others.

'it's just another way the government is trying and kill off investors. God help renters if [it] succeeds in this - which it won't because the country needs private landlords for rental stock - have you seen the state of a lot of public housing?'

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