Ring Fencing Matters

[Bob Kane]

My mole tells me that the intent of the Labour policy is to treat every property as a stand-alone tax unit.
So if you have two rental properties, one postive and one negative cash flow you would be expected to pay income tax on the profitable one but not be able to deduct the losses from the other.

Not sur how this would work if you buy a tin of paint and then use some on each house. Some creative accounting to be required there.

A negative cash flow property would have a mortgage.
Mortgages aren't linked to specific properties, though.
An example:
I know of an LTC with two properties and 8 mortgages.
The two properties have a combined value of about $700k.
The 8 mortgages add up to $900k.
Which mortgages would you use to calculate if each property is positive or negative cash flow?
When you take out another mortgage, the bank only checks if there is enough equity available to cover the mortgages.
At no stage is a mortgage ''locked in" to a property.
Can anyone see how Labour would be able to make this scheme work?

[Beano]

Doesn't this merely bring property inline with businesses? A business has it's losses ring-fenced.

Why would you say this?
A company may own several dozen buildings ...they all form part of the business.
Another company owns a dozen or so businesses ..some make money some don't
You don't ring fence losses of the departments that don't make money

[Anthonyacat]

At no stage is a mortgage ''locked in" to a property.

But they are, on drawdown! It's all about the intention on purchase of each loan. This is where the accounting gets so ridiculously complex that all your fees will skyrocket.

[Perry]

Are they, though? I once had one mortgage secured over two properties.

[sidinz]

By definition, you're a Speculator if you're running cash losses and relying on the price appreciation of a scarce asset to provide you with future returns.

Actual investors need not fear.

And what about the mum-and-dad investors who buy a rental knowing that they will have to prop it up in the beginning, but that it'll be a nice little earner by the time they retire, inflation and chipping away at the mortgage having done their thing. Are they speculators, too?

[flyernzl]

Oh yes. According to Labour.
(As today's letter to the Herald says, perhaps Labour is aiming to get their share of the vote down below 20% this time round).

[Perry]

They're doing well, so far, then.

[Lego_Squared]

And what about the mum-and-dad investors who buy a rental knowing that they will have to prop it up in the beginning, but that it'll be a nice little earner by the time they retire, inflation and chipping away at the mortgage having done their thing. Are they speculators, too?

I should have said operating losses to be clear, not cash losses. Obviously the principal component of the mortgage repayment is irrelevant anyway as you can't claim tax back on it.

But if your rental income is less than the interest component plus expenses, then by definition the logic of the investment relies on capital appreciation. Which is speculation. And so Little says, if you want to speculate, do so, but don't use it as a double bonus to lower your own personal income tax. What you've described isn't of the more egregious type i admit, but actually it doesn't matter whether you are a Mum, Dad, churchgoing, good Samaritan, Mother Theresa or whatever, it's the investment logic of the arrangement that decides whether it's speculation or not. Now I'm not making a moral judgement on speculation, in fact it's my business (not property) but if society decides that it's generally not a good thing in the housing market, then people will have to amend their investment strategies accordingly.

[Bobsyouruncle]

as Labour have 2 chances of becoming government this year, who cares?

[Perry]

Not So

But if your rental income is less than the interest component plus expenses, then by definition the logic of the investment relies on capital appreciation. Which is speculation.

That is simply nonsense. Many, many business operations start out by making losses in their formative years, all the while hoping for better things and profits, in the future. That's why tax depts. allow accumulated business losses to be carried forward.

Despite the observations you've made about logic, those comments of yours are a good example of the logical fallacy: Post hoc ergo propter hoc.

[flyernzl]

Look at Xero.
Substantial losses for many years.

[Nick G]

@Lego Squared - or something changes so it is positively geared. Usually a combination of reducing debt, reducing other costs and increasing rents. My rents just went up 10% and my costs dropped a bit as debt went down.

[donna]

Oh yes. According to Labour.
(As today's letter to the Herald says, perhaps Labour is aiming to get their share of the vote down below 20% this time round).

hahaha - nice one - fingers crossed!

cheers,

Donna

[Bob Kane]

At no stage is a mortgage ''locked in" to a property.

But they are, on drawdown! It's all about the intention on purchase of each loan. This is where the accounting gets so ridiculously complex that all your fees will skyrocket.

You're describing a mortgage taken out to purchase a property.
But what happens when you take out a mortgage without purchasing a property?
Which property will the ring fencing calculation use?
I hope you can follow what I mean - hint: current account.
Another example:
You own 4 properties with 4 mortgages - traditional situation.
You get fed up with your current bank and move to another.
You decide to simplify the mortgages by merging them into one large mortgage.
New situation is 4 properties with one mortgage.
How will you select which property to use for the ring-fencing calculation?
After a year you decide to split up the one large mortgage into 5 smaller mortgages of different amounts and different interest rates.
How will you select which mortgages to use for each property ring-fencing calculation?
It seems like you can't ring-fence per property as mortgages don't map onto properties directly.
I think this is the fatal flaw in the Labour party suggestion.
There may be others.

[Bob Kane]

But if your rental income is less than the interest component plus expenses, then by definition the logic of the investment relies on capital appreciation.

You're making a mistake in your thinking.
You are ignoring time.
The rental income may be less than the expenses this year.
But what happens in 10 years time? Or maybe 20 years?
The rental income may exceed expenses then.
That's what us long term investors are looking at.
We don't like selling and don't want to sell.
Steady increases in rent is all we need.