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Labour is preparing to release a policy tackling the practice of negative gearing in the property rental industry, saying “rich property speculators are getting even richer as a result of the current tax system”.
Described as closing a “speculation tax loophole” which also includes other new policies such as banning overseas investors buying existing homes and an extension to five years of the “bright line” capital gains tax on rental houses that are sold from the current two year threshold introduced by National in previous years.
How Negative Gearing Works.
Negative gearing at the very basic level is defined as losing profit on an investment as a strategy. Allowing rental property owners to deduct a third of their expenses.
If a property brings in $400/week, but the overall expenses for that property come in at $550/week meaning you have a net loss of $150 every week on that property. With the current negative gearing rules, you can get a tax deduction on the loss of $150/week.
There is an appealing tax loophole property investors and landlords can use. Meaning that if the cost of a rental property in mortgage interest, maintenance, water and rates is more than the income it generates from rent, the owner can get a tax deduction on the loss.
Say your rental income off of an single property for the year was $30k, and the expense such as rates, interest, maintenance and repairs were $50k. That would mean that there would be a $20k loss on the property.
Assuming you earned$120k before tax each year, this means that when you do your tax return, you can declare your $20k loss to the IRD. Which means that with the tax loophole, you would only have to pay tax on $100k instead of $120k.
$120k at personal tax rates is $30,520, but on the $130k it is only $23,920. So this means you would save $6,600 on tax!
How negative gearing benefits landlords and property investors.
However, the fact remains that shelling out your own money to pay for a property to cover mortgage and save a bit of tax sounds crazy!
So why do so many property investors and landlords do it if they are having to put out money and lose money?
Well actually there is many different things that make negatively geared appealing for both landlords and property investors.
One biggest pros for negative gearing is capital growth and why many people get into the renting game in the first place.
If you can lose $5,000 per year on property for a 5 years then you have lost $25,000 over that ten years. But what happens if that property goes up $300,000 in that 5 year period?
Well you have lost $25,000 but you have made $300,000, so your profit on that is actually $275,000 dollars.
So if you are getting the capital growth that you want from the property it can be very profitable to be owning negatively geared properties because of capital growth. The value of the property can be so significant that it out ways any cash that you are going to have to put in it anyway.
Capital gains is the number one reason why people invest in negative geared property in New Zealand
However, no investment strategy can be called “fool-proof” and as with any investment strategy, there is a degree of risk that comes with negative gearing.
Who does this policy effect?
To put it bluntly, Labour’s negative gearing taxes will affect anyone who rents out their property.
Those hit the hardest will of course may be property investors who own multiple properties. However, those with smaller portfolios might also be hit too although they tend not to rely so heavily on negative gearing.
The Property Investors Federation (PIF) has called Labours new policy an example of “direct attack” on mum-and-dad landlords and property investors.
With all these changes coming into the real estate industry, for landlords and property investors, staying compliant has become harder than it ever was!
If you are a landlord you need to make sure you are complying with your legal obligations.
There can be a lot to remember if you are in the business of being a landlord or property investors. Making sure that you meet your obligations under tenancy law can help in avoiding any problems during the tenancy.
There are resources such as the checklist on tenancy website, however the list itself can be daunting and overwhelming to go through. Especially for landlords who are new to the property game.
At Kitt, we take care of both problems - staying compliant and automating property management to make it easy. So you can spend less time checking rent and more time at the beach!
Kitt is a digital property management platform for self-managing landlords and property investors. Covering everything from ordering jobs, checking rent, managing inspections, accounting and loads more.
Come and check out what Kitt’s all about. www.kitt.io