Accountant says cutting big tax advantage of property investors won't create rental shortage
Normally I don't do much more than just take a quick whiz through your column, but after reading all the recent tantrums from residential landlords, I couldn't resist but write.
I work as an accountant in one of the largest chartered accountancy firms in New Zealand. My job? I prepare financial statements and tax returns for businesses. I know exactly what goes on in residential property investment. In fact, I prepare accounts for a different LAQC [loss attributing qualifying company, where rental property losses can be offset against personal income resulting in lower tax] every couple of days, it seems.
Do property investors have a tax advantage? Yes. A big one. A finished set of accounts always looks the same. Big tax-free capital gain while claiming big PAYE refunds every year along the way.
Will cutting down on this create a shortage of rentals? Of course not. I am sure you will find the only reason so many people rent is because they cannot afford to buy.
In my profession the vast majority are certainly of the belief these proposed changes are long, long, long overdue. In fact, I think it's very clear that the only people who are upset about these changes are - you guessed it - residential property investors, who have been enjoying tax-free capital gains on overpriced (and poor yielding) houses for too many years.
Of course they're all complaining about the new laws. But the old saying rings true - never ask a car salesman if you need a new car.
Thanks for giving us the word from the horse's mouth. Your letter might lead to more than a few landlords looking sideways at their accountants from now on, but so be it.
I wonder if anyone else is facing the same dilemma. I am 31, a technical manager, and earn around $90,000 a year. If I was to move to Australia, my income would be at least $130,000.
In the past the only reasons I have stayed in New Zealand are:
* A sense of misguided loyalty.
* I naively had a retirement plan based around properties.
So since 2005 I've accumulated four rental properties, all neutrally geared after factoring in maintenance, repairs, etc.
With the removal of depreciation from rental properties, the Government has destroyed my plan for retirement and removed the only tiny advantage to people like myself for staying in this country.
Since loyalty can only carry one so far in life, can you please help me to continue fooling myself that living in New Zealand is better than crossing the ditch?
First, the Government hasn't yet "removed" depreciation. Let's wait and see what's in the Budget. Even if it does, it probably won't make a huge difference to you.
In many cases depreciation is clawed back when you sell the property, so it's only an interest-free loan. While that can be worth a fair bit, I wouldn't have thought its removal would "destroy" a plan that was otherwise sound.
Beyond that, you seem to imply that New Zealand is lucky to have you - and that might well be the case. But perhaps you are also lucky to have New Zealand.
If the only thing you appreciate about this country is a tax break, it might be time you went and lived elsewhere. The experience might open your eyes.
I'm astounded at the sense of entitlement shown in your column by those former free-market enthusiasts lamenting change in the rental investment landscape.
Investors in property seem to want the equivalent of a government guarantee - underwritten by all of us - that market conditions will always provide a profitable outcome for their business decisions.
We hear stories of people who give up their weekends (gosh) to make capital improvements to their properties, feeling let down that their efforts may not produce the excessive levels of reward enjoyed until recently. We even hear claims that properties now available for rent will vanish. Where will they all go?
Every small business owner suffers these trials daily. Capital is sunk into enterprises, midnight oil is burned and jobs are risked on very good ideas that may or may not succeed. That's business, and it's not straightforward. Yet property investment is a field where new ideas seem to count for less than dogged persistence and a good whinge.
We will not succeed as a nation borrowing from Japanese banks to pay each other ever-increasing amounts for poorly built, short-lived houses and tenements. It's over.
You might have got a bit carried away with that last bit. Not all property is poorly built and short-lived. But you make some excellent points. Many rental property owners have day jobs that provide them with steady income, whereas small business owners often put everything on the line. When they do badly, they wear it. When they do well, sure, they benefit - sometimes hugely. But many others, and the country as a whole, also benefit.
Perhaps we should start letting small business owners depreciate things that don't depreciate, and ignore gains at tax time.
I'm the person whose letter led your column last week. I really wish you hadn't made assumptions - you could have asked me.
My rental properties are in Browns Bay, One Tree Hill and Claudelands (Hamilton city centre) - not all in one neighbourhood.
Don't rely on statistics. You quote Wilde so perhaps I'll quote Twain on the three types of lies - "Lies, damned lies and statistics".
I have talked to four agents in each of the above-mentioned neighbourhoods, and the common theme is the stats are wrong. The market has ground to a halt. The Government has declared changes but is refusing to commit to detail.
You yourself recommend holding off if you don't have a grasp of the whole picture and, well, no one does right now. Who knows what the Budget will eventually reveal? I have had offers for each property, and they are all at the figures quoted in my letter.
My accountant advises of course I can claim capital losses - but they will be lost if I am bankrupt (and I am not far away).
I have moved to interest-only mortgages, but as my work has dried up and I too have been made redundant I am taking any work I can, but I am well behind on mortgages. Mortgagee sales are imminent.
One tenant was relocated to escape a husband who was beating her and her son. Her references were perfect and she had perfect credit. Her husband found them and destroyed the house. She ended up off work and shattered (understandably). He was arrested and she has tried to catch up as well as pay for the insurance excess. She simply can't, and I have had to evict her. (That really felt horrific.)
Another was a young family, again with perfect credentials. The husband lost his job and things went pear-shaped. Mediation resulted in them being ordered to pay $15 a week to catch up on $3960 in rent. They never paid a penny after mediation so I had to evict them.
Another was a young couple with great credentials - they split and she couldn't afford the place herself. You get the idea.
I use property managers and they are diligent in vetting people, but situations change for the worse very quickly these days.
The properties are a third below what I paid - and I am not alone. If I had done what my friends had done (partied, travelled, wasted money and weekends having fun) I would be in a better place now.
And assumptions based on half a story actually hurt the most. Please do your research. Perhaps I shouldn't have written. "Better to remain silent and be thought a fool than to speak and remove all doubt."
Sorry that I upset you, but I'm not sure what I did wrong - other than suggesting you be fussier about picking tenants when it sounds as if you've had extraordinarily bad luck in that respect.
You said your properties were all in "good" areas, and I responded that it's lower-risk to own properties in a range of neighbourhoods.
What I meant was good, medium and bad neighbourhoods, as defined by property prices, quality of schools and amenities, crime rates and so on. The lower house prices in "bad" neighbourhoods sometimes mean they are more profitable as rentals.
On house price statistics, I didn't rely on anything.
I just expressed surprise that your house values have dropped by a third.
That can mean one of two things: either you've had really bad luck in that respect, too, or house values all over New Zealand have fallen by a third. While the stats might be too optimistic, it's hard to believe they are that far out of whack.
It's good to hear you've talked to your accountant and also that you've switched to interest-only mortgages - all of which shows that my suggestions to do those things were valid.
But enough of me defending myself. You are the one in an unenviable situation, and I do hope you and others who read your story don't come away with the idea that partying always - or even usually - beats investing. It doesn't.
Any investment with potentially high returns has its downside, and yours is a textbook example of a worst-case scenario. I do hope you recover from it, and live to invest another day.
Meantime, while you might wish you hadn't written to me, I'm glad you did. Too often the only ones who talk about their investments are those who succeed, which gives everyone a distorted picture. Your letters will have taught people plenty. Thank you for writing.
PS: It would be far too mean to ask whether you were originally expecting to pay tax on the gains on the properties - given that you are planning to claim the losses - so I won't ask.
Your articles are just disaster. How come you deliver very personal biased opinion to the public? I do hope you not to write any more in paper and stop propagating uneducated data using the paper media. I feel for you. Just give the advice to your family and keep it in your family. Best of luck to your family. Good luck. [sic]
And to you, too.
Good advice, Mary, keep it up.
My mother used to say, "Good things come in small packages." After the previous letter, I was beginning to wonder. Then I opened your email, and it all came right again.
Mary Holm is a part-time university lecturer, consumer representative on the board of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. Her advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.
