This article was published on 22 September 2009. Some information may be out of date.

More than one way to tax investment property

There’s more than one way to skin a cat — or to change the tax system to discourage New Zealanders from investing in rental property.

New Zealand rental properties are worth $200 billion, according to NZX boss Mark Weldon, a member of Victoria University’s Tax Working Group. “And what’s the tax take on that?” he asked members of the Institute of Finance Professionals at their annual conference. “Minus $500 million, and that’s not counting IRD time.

“Where I sit on tax,” he added, “It would be a pretty radical move to stick with the current tax system.”

Other experts echo that view. It seems highly unlikely the Tax Working Group will recommend that the government leaves things as they are.

Probably the most commonly mentioned change would be to introduce a capital gains tax — on investment property, all property, or all assets. But the experts have reservations about how it might work. Other possibilities are:

  • Enforce the current law more strictly. Gains on property or other assets are supposed to be taxed as income if you are in the business of buying and selling, or if you bought the asset “with the clear and dominant purpose” of “selling or otherwise disposing of it”.

    Given that many people have bought rental property knowing the rent wouldn’t cover the mortgage and other expenses for many years, they could hardly argue they didn’t buy with the intention of selling — hopefully at a gain that would more than make up for years of losses. While most of those people don’t pay tax on their gains, closer scrutiny could change that.

  • Ring-fence losses so they can be deducted only against future profits on the property, not against other income. Officials have been considering this for some years now.

    Landlords who never make a profit on a property until they sell it, and don’t pay tax on the sale proceeds, would never be able to deduct the losses. And some would say that’s fair enough.

  • Change depreciation rules. According to Weldon, depreciation on New Zealand rental housing amounts to $1.4 billion a year, and yet the value of almost all that housing actually rises over time.

    True, the depreciation is in most cases clawed back when the property is sold. But landlords have the use of the money in the meantime. The government may at least reduce property depreciation rates.

  • Charge a land tax based on government valuations — rather like rates — on all property or just investment property. Several commentators seem to like this idea. There could be provision for those who couldn’t afford the tax to run up a bill that is repaid when the property is finally sold.
  • Charge stamp duty on sales of investment property or all property. In Australia, such duty can amount to $10,000 or $20,000 or so.
  • Add a surcharge to mortgage interest. This has been proposed before, and could rear its head again.

No doubt there are other possibilities, all with their pros and cons. Who knows which will happen? The status quo is also possible, but after all the talk, that would be surprising.

The other question is whether a change would affect all properties or only those bought after the change. The latter might seem fairer, but it could lead to people holding on for years to property they would otherwise sell, which would distort markets.

What does it all amount to? If you’re thinking of buying rental property, keep in mind not only that prices might not rise much for a long time, but also that the tax environment might not stay as benign as it is now.

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Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.