Hawke's Bay Property Investors' Association

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05-05-2014

Labour to Ring Fence rental property losses

Among the detail in Labour's recent policy announcements is ring-fencing any losses so that they cannot be used to offset personal income.

When a rental property is first purchased, the rental income is often insufficient to cover all expenses. It can take a number of years before the property becomes cashflow positive from a tax point of view. This situation is not unique to rental property, as many businesses are not profitable in their first few years of operation.

Labour's proposal would see rental property treated differently from other businesses, which means they would use tax policy to influence peoples' investment decisions. It is commonly considered bad policy to use tax as a means for influencing people's investment decisions.

This policy would likely affect new investors, as more established investors are likely to have other cashflow positive property that they can use to offset the loss of any new rental purchase.

A similar policy in Australia saw housing construction slow and rental prices skyrocket. During the two year period between its introduction and removal in Australia, nominal rents nationally rose by over 25%.

If this was to occur in New Zealand, the current median rental price would increase by $92pw from $370pw to $462pw.

Over the last few years the rental industry has seen numerous impositions that have made it harder and harder to provide rental property in New Zealand.

  • Removing rental property owners' ability to depreciate their properties.
  • Removing LAQCs as a structure for holding rental property.
  • Slower access to Tenancy Tribunal hearings causing greater losses.
  • Loan to Value Ratios hindering rental property ownership.

Labour have been proposing a Capital Gains Tax on rental property for a number of years, but this will also affect shareholders, business owners and farmers.

Today's announcement by Labour ring fencing rental losses targets the rental industry directly and will make it extremely hard to provide new rental property for many investors.

As we are entering a period of interest rate increases, many rental property owners would have a greater incentive to increase rental prices to offset cost increases, if ring fencing was introduced.

The NZPIF has released a media statement objecting to the proposal which you can view here.

Tags: ring fencing - labour - media release

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