Property taxes – what’s going on?

Property taxes – what’s going on?

It’s unusual for tax to be a front page issue but right now there are a lot of headlines being generated and a lot of hyperbole being used by many media commentators.

This article is an attempt to look past the spin to make sure that you are up to speed with the tax changes that have occurred that will affect you now as well as the proposals that have been put forward and the likely effects that these proposals will have on you. Property is the main focus of this article but as future clarifications to government policy are released we will write an update on how these changes affect business owners too.

Auckland city skyline

OK – so what has been put in place already?

From a tax point of view, the biggest change to arrive soon that will affect property owners is the “Ring Fencing” of rental property losses. This is new legislation, introduced to parliament in December last year and with an application date of 1 April 2019 (just around the corner).

Put simply, this legislation will prevent rental property owners from using any rental property loss to offset their employment or business income. Certainly in Auckland, most property investors who have bought in the last couple of years have done so at prices that are so high relative to rents that they are very likely to be making a loss on the investment. If that is you, you would have been pleased to at least see a tax refund as a way of softening the overall loss that you are making. Going forward (assuming this legislation passes), these tax refunds will not be coming any more.

Other investors, who bought their properties in a time when prices were not so high, or who bought in a part of New Zealand where rents are higher compared to property prices are less likely to be making a loss on their investment (ie rents will be higher than interest and other costs). These investors will not be affected by these rules.

What can be done to deal with this?

Although “Ring Fencing” on the face of it sounds simple, the legislation comes with a range of anti avoidance measures to stop people from restructuring their affairs and being able to carry on as before. I see lots of people commenting on social media and in the comments sections on articles that these changes will cause more people to “move their investments in to trusts”. If only it was that easy!

First and foremost, the most important thing to do is be aware that these changes are very likely to come in and to budget accordingly.  Despite lots of talk over the years about interest rates going up, they have gone down a little and for most people this will help with cash flow.

Reports are that rents have gone up in most places over the last couple of years. Combined with the very low interest rates it may be that with a small increase in the rent charged your rental property is not that far from breaking even!

Most of the people that we deal with who own property do so as a long term investment. Over the long term, rents will rise and the mortgage will reduce (causing interest payments to reduce too). Rental losses in the next few years are able to be utilised when the property becomes profitable in future.

What is coming on the horizon?

Most of the tax related headlines this week are related to the Tax Workings Group’s proposal to introduce a Capital Gains Tax (in common with most developed countries). This is very much in the proposal phase and it seems very unlikely that all of the proposals that the Tax Working Group has put forward will end up in place.

Having said that, to me it seems likely that Labour will pick up a Capital Gains Tax that applies to rental property owners as part of their policy for the next election. With Simon Bridges currently the preferred PM by only about 6% of the country (and with the PM above 40%) it’s certainly not beyond the realms of possibility that we see a Capital Gains tax at least on rental properties after the next election.

In the meantime, watch this space. It would be worthwhile considering a capital gains tax when running your sums on potential property purchases. Remember it’s still better to make a dollar and pay 33 cents in tax than not to have made that dollar!

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