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  • Tax trap in '$1000 down' flats

    Tax trap in '$1000 down' flats
    By GREG NINNESS - Sunday Star Times | Sunday, 17 June 2007

    Tax experts and lawyers are warning investors of the potential dangers of buying residential investment properties "with just $1000 down".

    Such arrangements have become fairly common during the recent property boom, usually promoted by developers selling apartments "off the plans" before they are built.

    The projects are often extensively advertised with the line that investors can buy a brand new apartment "for just $1000 down".

    This usually involves the investor borrowing the entire purchase price, plus a bit more, and securing the lot with a mortgage over their existing home as well as the apartment they are buying.

    The investments are usually loss making and interest payments on the mortgage and other costs are far more than the rental income the apartment eventually generates.

    Those losses can cut investors' tax bills, which in turn can cut their cash loss each week, but even so, they may still have to dip into their pockets each week to make regular payments to keep the scheme afloat.

    The short-term pain of a cash loss is balanced by an expectation that property prices will continue to rise and they will be able to make a substantial capital gain a few years down the track.

    But investors should not assume the capital gain would be tax-free, said Jo Doolan, a tax partner at accounting firm Ernst & Young.

    "The tax-free status of the capital gain in such arrangements would have to be seriously questioned," she said.

    This is because the investment always runs at a loss and never provides the investor with an income, which implies they bought it with the intention of selling it for a profit. "And that's exactly what the government gave the IRD an extra $14 million for in the budget, to crack down on that type of thing."

    Doolan also warns that such investors would be at serious risk if the government changed the tax rules which allow the losses they produce to be offset against other income. This is usually a central component of such schemes as it reduces the cash outgoings the investors have to pay each week.

    If the rules were changed, investors could suddenly find themselves shouldering a higher portion of the losses and a corresponding drop in their weekly income.

    Grant Pearson, a partner with law firm Duncan Cotterill, described this possibility as "quite scary" for some investors because of the large amounts of money they had borrowed to fund their investments.

    If the rules were changed, "they could find themselves in quite a bit of difficulty and it could get pretty ugly, because the numbers are quite large", Pearson said.

    But Carl Gray, manager of LJ Hooker Development Services, a real estate agency which sells many investment properties, is not worried by such talk.

    "Well, how quick do you think the government is?" he asks.

    "It takes them 20 years to do anything. So how long will it take to change (the tax rules)? We don't know, but I'd suggest it would take a fair while."

    Doolan sees a closer horizon.

    "While it's highly unlikely they'll deal with it before the next election, it's still on the agenda to be looked at," she said.

    Doolan also says investors should be cautious about a property's value when buying off the plans, even when it is supported by a registered valuation. Some investors have been burned when they have had to resell at a loss.

    http://www.stuff.co.nz/sundaystartim...7651a6445.html
    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx

  • #2
    This in my 'Inbox' yesterday:

    Originally posted by Dean
    This is just a quick note to tell you about a new subdivision that a good friend of mine has at greenfields stage in Gisborne. It's called Sponge Bay and looks fantastic.

    The opportunity is for you to purchase a site now for $1000 down.

    The balance of the deposit, (10&#37, will need to be paid when resource consent is issued in about 6 weeks, BUT the development is pre-approved for deposit bonds so you can bond the deposit and ONSELL before title :-)

    I did this when I started investing and it really got me off the ground. For an investment of around 3 grand you can make maybe 30 grand. That's 1000% !!

    I know Matthew Gilligan the developer personally and all his current and previous developments have been very profitable for investors. There should be every possibility to onsell before settlement at a good profit, and your only holding costs are $1000 plus the deposit bond fee.

    Sites on the bottom right are the closest to the beach if you want one to keep. If trading, buy the cheapest ones that are left as they should have the biggest growth. Download the brochure and see which sites are left by clicking HERE, then email me the lot No's you'd like and I can get paperwork to you.

    Stay Safe, Dean
    DFTBA

    Comment


    • #3
      Nothing wrong with using Bonds but promising capital gains is just stupid and risky. Its tempting to buy one just to ###k them over at settlement if no gain arrived!
      Matthew out of accountancy now huh? I'm quite happy to have him do my Tax but question what he really knows about Property Development.

      Comment


      • #4
        Originally posted by captaincrab View Post
        Nothing wrong with using Bonds but promising capital gains is just stupid and risky. Its tempting to buy one just to ###k them over at settlement if no gain arrived!
        That's not a very good idea, it's a big angry insurance company that you will be ###king over and they will run you over with a steamroller if you don't pay. The developer doesn't care, the bond company pay them the bond and they just resell the section.

        Comment


        • #5
          Originally posted by captaincrab View Post
          Nothing wrong with using Bonds but promising capital gains is just stupid and risky. Its tempting to buy one just to ###k them over at settlement if no gain arrived!
          Matthew out of accountancy now huh? I'm quite happy to have him do my Tax but question what he really knows about Property Development.
          captaincrab,

          Do you know him personally?.....first names and all that?

          It doesn't help anyone if it's just an ignorant and uninformed comment!

          Comment


          • #6
            Originally posted by Glen View Post
            captaincrab,

            Do you know him personally?.....first names and all that?

            It doesn't help anyone if it's just an ignorant and uninformed comment!
            I agree with you Glen.

            Also from my experience Mathew is really switched on and operates a smart business.

            Ross
            Book a free chat here
            Ross Barnett - Property Accountant

            Comment


            • #7
              A few comments.

              Just because you only use a $1,000 deposit doesn't mean you will only put in $1,000.

              Deans email suggested a trading activity so it would be subject to tax anyway.

              All this CGT talk is annoying me. how much do you is the reserve bank paying the hearld?

              Comment


              • #8
                Confidentiality?

                Hi cube,

                Personally, poormastery wouldn't post comments from a personal message, unless poormastery had the agreement of the person who sent me the message to do so.

                Out of interest, did pooomba ask you to post this message?

                Regards,
                *poormastery*

                Comment


                • #9
                  Originally posted by poormastery View Post
                  Personally, poormastery wouldn't post comments from a personal message, unless poormastery had the agreement of the person who sent me the message to do so.

                  This was a mailing list email. Lot of people on PT (myself included) would have got that same email. So I dont think that classifies as a personal message.

                  Comment


                  • #10
                    Hi Rentmaster,

                    Fair enough.

                    On the issue at hand, it is interesting to see these financial products hit the property market.

                    Poormastery once had a crack (rather unsuccessfully) at trading futures on my own account. I was short the USD, the NasDog, the Dow, the S&P et al during the dotcon bust, and I was doing rather well. I had stops in place, and I was quite careful.

                    I started to believe the ideologues that were ranting that the end of the world was nigh. I got haughty, tripled up and removed the stops. Unbeknown to me, equity valuations had fallen so far that dividend yields surpassed bond yields. The biggest intraday move in 15 years occured (around 15% - with the indices first falling 7% by lunchtime, and then regaining all this lost ground and actually ending the day up by 8%). Equity valuations burst upwards in such an extremely sharp spike; I was forced to close out my positions (at a small loss). My ambitions of a first class ticket to NZ et al were but a memorable dream, and I was left nursing a loss and learning a few life lessons. No doubt some Goldman's trader gobbled my money in his huge pot.

                    I realised that I shouldn't have been trading these products in the first place - I was up against sophisticated investors.

                    As similar products hit the property market, I suspect that the RB will be concerned. Property already has significant leverage with mortgages - the RB might well believe that these small bonds are increasing leverage to dangerous levels. In addition, many of the investors trading these properties are unlikely to be sophisticated - at least in financial market terms. Even though banks' risk management systems are unbelievably sophisticated, things still go wrong.

                    Perhaps some of these property traders will suffer the same fate as the humble poormastery, and receive a sharp smack on the bottom?

                    We will see...

                    Regards,
                    *poormastery*

                    Comment


                    • #11
                      Captaincrab

                      Matthew does know his stuff. This particular subdivision, he found it. He he was instrumental in the design it and he sold it through his contacts

                      The key to subdivisions is quality and this is a quality subdivision

                      Note:

                      I am biased as you know

                      Comment

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