Government considers tougher rules for rental properties

[muppet]

Government considers tougher rules for rental properties
4:30PM Tuesday June 19, 2007
By Ian Llewellyn

Dr Cullen said the Government was looking for support from National.

The Government is considering removing the ability of rental property investors to claim losses against their taxes.

Finance Minister Michael Cullen told Parliament he was considering the move as a part of the Government's wider concerns about monetary policy.

"One option which emerged as having (a) potential positive impact was the ring fencing of losses from residential property investment. This of course would not be new, it was the law in New Zealand before 1991."

Dr Cullen said the Government had not yet decided to implement the changes and was looking for support from National on the issue.

He claimed senior National MPs had differences over the merits of changes to the tax regime for rental properties, but Dr Cullen said it was worth investigating further.

"Since the repeal of those provisions in 1991 there was very, very substantial growth in losses which substantially outgrew the actual rental income and that clearly pointed to heavy (debt) gearing for the purchase of rental property, contributing probably to heating of the housing market."

http://www.nzherald.co.nz/section/1/story.cfm?c_id=1&objectid=10446656

[AndyB]

I guess everyone is waiting to see if Cullen really does go through with the plan to ring fence loss recovery through property investment.
I think it will probably happen - it seems there is no debate but rather just waiting for the 'Yesses' from National to come through.
It could change a lot of the dynamics of property investment as it is today. Many investors may become more reluctant to negative gear. What are your thoughts?
I wonder, I don't know a lot about it but, how will it affect the laqc system?

[artemis]

Cannot see it happening unless National buy in. I think it is a kite flying exercise.

And why do we have these? To show the government is actually doing something (yeah right). The action you take when you are not taking any action.

Or as a diversionary tactic - drop this approach and bring in a 'lesser evil', eg rework the LAQC rules.

And sometimes to judge the force of public reaction. Cannot see that here as reaction can easily be predicted.

Whichever - seems seriously cynical to me.

[muppet]

Landlords' tax breaks in the firing line
5:00AM Wednesday June 20, 2007
By Anne Gibson

The Government is considering axing the scheme where landlords and property investors claim losses against their taxes - a move which could see tenants lose their homes if owners sell.

Finance Minister Michael Cullen told Parliament he was considering the move as part of the Government's wider concerns about monetary policy.

"One option which emerged as having a potential positive impact was the ring-fencing of losses from residential property investment.

"This, of course, would not be new. It was the law in New Zealand before 1991," Dr Cullen said. The Government had not yet decided to implement the changes and was looking for support from National on the issue.

Dr Cullen said senior National MPs differed over the merits of changes to the tax regime for rental properties, but it was worth investigating further.

"Since the repeal of those provisions in 1991 there was very, very substantial growth in losses which substantially outgrew the actual rental income and that clearly pointed to heavy [debt] gearing for the purchase of rental property, contributing probably to heating of the housing market."

Bryan Thomson, head of the largest real estate agency, Harcourts, said he feared the loss of tax deductions because of the impact on the private rental sector.

Around 400,000 houses and flats worth $140 billion are rented to 1.2 million tenants.

Mr Thomson said that as home affordability worsened and renting became more common, more people might depend on the state for a roof over their heads.

Landlords were already finding themselves financially stretched with interest rates in double-digit territory. Mr Thomson said the loss of tax breaks would be a further blow.

"Landlords could automatically sell properties and the outcome could be that the Government would have to construct a lot more state houses," he said.

But he believed the loss of tax breaks was so far-fetched it would not get any further than talk.


Instead, he called for the Government to tackle inflation by targeting the farming sector, saying rising Fonterra payments were a significant factor in consumer spending and inflation.

"Blimmin' dairy farmers - maybe the Government needs to legislate on the number of cows."

The Reserve Bank and Treasury have been pushing for tougher tax rules for more than a year.

Bernard Hodgetts, acting economics head at the Reserve Bank, prepared a paper for this month's parliamentary select committee on housing affordability, pushing for precisely this.

He blamed current tax laws for fuelling the housing market.

"It appears that tax policy has been a factor behind the rise in the proportion of residential properties being used for investment purposes, which in turn has been a contributing factor on the rise in house demand," he wrote in the bank's submission.

He reminded the select committee that last year, Treasury and the bank had explored the problem and called for greater enforcement of tax rules on rental properties.

Last month's Budget assigned an extra $14 million for Inland Revenue to catch landlords who broke the law by deliberately evading paying tax they owed.

But many people in the sector saw this sum as laughable because the scale of the tax evasion problem in the rental sector is so huge.

National's finance spokesman, Bill English, said Inland Revenue officials had told MPs there was no tax advantage for rental properties over other investment types.

In fact, it was worse because it attracted a capital gains tax in some instances.

Dr Cullen said Mr English was wrong and the IRD had been talking only about capital gains issues between different asset classes.

The minister said property had a tax advantage because people could borrow heavily and then claim losses.

"Housing purchasing is one of the very few areas that you can actually borrow 100 per cent of the purchase price with no prospect of actually a return on equity except in terms of the capital gain at the end of the process."

John Shewan, chairman of PricewaterhouseCoopers, said last night: "I think it would be a serious mistake to jump opportunistically at what would be an ad hoc measure that is unjustified.

"Sir Robert Muldoon tried this back in the early 1980s. It was a devastating failure ... It would be contrary to good tax policy to delete one particular kind of investment and ring-fence losses."

http://www.nzherald.co.nz/category/story.cfm?c_id=71&objectid=10446795

[PC]

Should work nicely to push rents up higher.
Maybe a few bargain sales as well for the vulture fund.

The Labour strategy of increasing the number of people dependent on the state is coming along well.
Create your own voters - Niccolò Machiavelli would be proud!

[casacamo]

I can't understand the quasi-socialist mentality of reserve bank officials.
A few years ago they were bemoaning the fact that no one was saving for retirement and that there
would not be enough money to go around for govt. pensions.
So we make the decision to start looking after ourselves and provide the means for us (and our children)
to be able to retire without any drain on the govt. funds. Now it seems we are doing too well and we are
getting a bit above our station.
What other westernised country would be trying try to restrict the growth in wealth of its citizens like this.
Surely have hoards of wealthy, self sufficient retirees must be of benifit to the economy as a whole.
The proposed 'ring fencing & cap. gains tax proposals will only have the effect removing rentals from the
market & pushing up rents, and raising the selling price to cover any capital gains tax.
Is this not the case in other places where it has been introduced like Austrailia.
I would be interested in any Australian comments.

[Edinburgh]

If this was to pass, there would be a huge sell off.

I think it would be far more dramatic than the introduction of a capital gains tax because the market would quickly adjust to that, as it has overseas. Okay, you might be taxed, but at least you are taxed on a gain and it would be way down the track.

Losing the tax advantages of a loss making rental property would hurt immediately and to the extent that most people would dump these properties. After all, it is the only reason many of them were purchased in the first place over the last two years - the returns certainly don't make sense otherwise.

Nor would people continue to buy such properties.

This would have the impact the government is looking for. A flood of properties at the lower end would push down prices, people with such houses would not be able to sell and move up, so it would have a ripple affect and the whole housing market would move back initially and then settle at a lower level.

Of course, they would be swapping one problem for another - where do all the tenants go? Many thousands would be turfed out as non-cash flow houses go on the market and with few of these properties picked up by investors, they would have no where to go.

House price inflation might end, but rents would sky rocket and the demand for state housing would as well.

Traders like me would be very happy thank you very much as I can make rentals cash flow by tipping profits from my trades into them and if prices fall then I can get some real bargains.

But the majority are like people I heard of yesterday, Reporoa farmers who just bought two properties in Rotorua for the purposes of reducing tax. Such people will leave the market and not come back.

There is another issue and that is the impact of high taxes that cannot now be offset to the same degree. If the government takes away the tax advantages associated with rental property, it should replace it with something else, ideally tax concessions for somehow investing in productive NZ.

[artemis]

If this does come in, which I doubt, it will probably not be retrospective.

[NESW]

When they tried this little stunt years ago in Aussie, some Landlords pulled the plug and sold up and went elsewhere, thus pushing the rental asking prices and availability up further along the unaffordability and unachieveable scale in major centres (I didn't notice any short term increase in suburban rents).... so the decision was reversed.

However, I suspect Mr Cullen's statements appeals to the majority of your population who see Landlords as being rich so and so's who are ripping off the (poor) tax payers by not paying their due amount in taxes like the "poor" people have to .

Whether or not this makes him more popular I don't know (can't imagine it I wouldn't vote for him anyhow if I could vote in NZ) but it only creates further social divide.

[milodavies]

If the government does decide to go down this track, I'm interested to know how quickly it could be implemented.

Could it be implemented for the tax year ending Mar-08 or would more likely have to wait until the Apr-08 to Mar-09 tax year?

I would have thought that to implement for the current tax year ending Mar-08, that would effectively be retrospective legislation - surely they wouldn't do that? Does anybody have a view on this?

[Gatekeeper]

Of course, they would be swapping one problem for another - where do all the tenants go? Many thousands would be turfed out as non-cash flow houses go on the market and with few of these properties picked up by investors, they would have no where to go.

House price inflation might end, but rents would sky rocket and the demand for state housing would as well.

Can't get my head around why there would be a problem.
The pool of houses is the same size, rented or owned.
I agree it would pull house prices down (good, from my perspective), but the market would take care of demand by way of price. A swing to more home owners, less renters maybe. But these houses won't stand empty.

The losses would still be retained surely, and claimed against any future profit. Surely profit is why you invested in housing? If not, is it truely a business for which you should be claiming expenses?

Hope that makes sense

[cube]

Anyone any idea how many of those 1.2 million renters would a. want to buy and b. be in a position to buy if prices dropped, say, 20%?

From what we have been told, some people are rent because of things other than finances (mobility, location etc.) and these people will continue renting.

Others - beneficiaries and the low-waged - still won't be able to afford to buy.

That leaves a group who want to buy but can't currently - if they outweigh the buying power of the investors who stay in the market, then prices will be stabilised by them, and houses will transfer from investor to occupier ownership.

Question - in Non-LAQCs, where losses are carried forward, what happens to those losses if the company is de-registered?

cube

[cube]

The losses would still be retained surely, and claimed against any future profit. Surely profit is why you invested in housing? If not, is it truely a business for which you should be claiming expenses?

Yes, people invest for 'profit', but in most popular asset classes, like property and shares, a lot of the profit comes from capital gain, not cash flow profit, and I'm not sure if selling or the asset gives rise to a profit that can be offset against earlier losses - any comments, anyone?

cube

[NESW]

Of the people (both professional and WINZ beneficiaries) that I know who rent, I cannot see it in their thinking that they will want to stop renting and purchase a home simply because in "some" areas it may become slightly more affordable.

In the cases I am aware of on the North Shore and Orewa, those people are renting what they could not "normally" afford to purchase.

I just don't see the purchase prices dropping enough to give them the opportunity to buy a home where they desire to live... so they will just stay renting.

But that probably takes us back to the discussion on buying where its affordable, compared to buying where One desire to be....

[OllyN]

Ask Dr Cullen

I agree with other posters that anything that discourages investment in rental property will only result in higher rentals. According to the media there are 200,000 residential landlords in NZ.
Lets suppose that each landlord has 3 tenancies and each tenancy has 3 people.
This means that 1.8 Million people would be hit hard in the pocket just by market forces alone, not to mention higher interest rates being fed through by a growing band of impoverished landlords.
And here's another thing for Dr Cullen to ponder over:
Doesn't the government, through Housing NZ, actively promote an investment scheme into private rental
property by guaranteeing rents for up to 10 years especially for those on benefits?
What will happen to these people if the private investor quits ?
Anyone for three more years of Hard Labour?
Olly Newland