KEY POINTS:
Property investors are under siege. The Government and Reserve Bank both want to dampen down the overheated property market. What's more, rising interest rates are starting to bite and low rents in relation to property prices make it difficult to make ends meet.
But that's not the end of the story. Property investors face 10 separate regulatory changes that will hurt many.
1. RING-FENCING OF RENTAL LOSSES
Loss attributing qualifying companies (LAQCs) are the darlings of property investors. They allow them to take operating losses from their rental properties and offset them against tax from their day jobs and other tax liabilities. Creative use of these tax losses can pull loss-making properties back into the black.
Finance Minister Michael Cullen was reported in June, however, as saying he was looking at ways to ring-fence those losses so that investors couldn't claim them against their tax bill.
Last year the Government put forward suggestions that LAQCs would be ditched in favour of Limited Liability Partnerships, which have allowed losses on a property to be carried forward, but not offset against personal taxes.
Ring-fencing, says property lawyer and author of Property Law, a New Zealand Investor's Guide Tony Steindle, is one of the most significant threats facing property investors today.
2. RESIDENTIAL TENANCIES ACT
The Residential Tenancies Act has been in the process of being updated for some years. These changes have been on the drawing board for so long that many investors seem to have lost interest. Yet the key reforms that are outlined on the Department of Building and Housing's website could have significant impact on landlords. They include limiting tenants' liability for damage to the premises to up to four weeks' rent if the tenant can prove that the damage was careless rather than reckless or intentional or he/she did not personally cause the damage. Fines and exemplary damages that can be awarded under the RTA will be increased. The Residential Tenancies Amendment Bill is currently being drafted and is expected to be introduced to Parliament later this year. Submissions will be invited when the bill is at select committee stage.
3. ASSOCIATED PERSONS RULES
Investors who trade properties along with builders and developers ought to beware of changes to the "associated persons rules" being considered by the Inland Revenue Department (IRD) and Treasury.
If the bureaucrats have their way, anyone involved in developing or trading properties will have their ordinary buy and hold rentals automatically "tainted", subjecting them to capital gains tax if sold within 10 years of purchase.
The move, which the IRD says is "fixing loopholes" but accountants, lawyers and property investor associations see as major policy changes, could see tens of thousands of investors paying up to 39 per cent tax as well as GST when they sell investment properties.
The suggested changes will automatically taint anyone or any structure that has a "significant degree of connection" with a builder, developer or property trader. The tests would bust open trading trusts, family trusts and other structures as we know them.
Steindle says the changes could pull innocent people into the CGT net. For example, parents could taint their children. www.taxpolicy.ird.govt.nz
4. OCCUPATIONAL LICENSING
Changes to the Building Act 2004 mean that from 2009 major building and design work will have to be carried out or supervised by a licensed building practitioner. From November 30 that year applications for building consents will have to include a list of the licensed operators who will be used in the project.
Investors who are handy with a hammer may be forced to employ licensed people to do jobs they could have done themselves in the past or risk owning a property that isn't properly consented under the Building Act.
This won't include tasks that don't need building consent such as:
* Painting and decorating.
* Maintenance and repair.
* Low fences, garden sheds, decks lower than 1m.
* Installing new kitchens or bathrooms or other internal joinery.
There are also tasks that require building consent, but will not need a licensed tradesperson to do them, such as:
* Installing a new external window or door.
* Building a deck over 1m.
* Removing or installing an internal structural wall.
* Building a structure not intended for human occupation as a residence or workplace such as a farm storage building or garage.
It's possible that major work carried out by a DIY property investor might be listed on the LIM report - which could devalue the property.
www.consumerbuild.org.nz
www.dbh.govt.nz
5. NEW ENERGY EFFICIENCY RULES
New properties are likely to become more expensive to build, thanks to changes to the Building Code, which could see more stringent energy efficiency requirements. Consultation has already closed and a decision is expected from the Government in October this year.
The four main proposals are:
* Improved thermal insulation performance requirements for new homes.
* Making it easier to install solar water heating systems.
* Improving lighting in commercial buildings.
* Improving heating, ventilation and air systems in commercial buildings.
Building Issues Minister Clayton Cosgrove says the rules could lead to savings of up to 30 per cent in the amount of energy required to heat a home. They would, as well, add an additional $3000 to $5000 to the cost of a new home.
6. DOMESTIC HOT WATER SYSTEMS
Cosgrove has also announced moves that could see domestic hot water systems in new homes need to be more energy efficient.
7. LIMITED LOAN-TO-VALUE RATIOS
Reserve Bank Governor Alan Bollard is looking at ways to increase costs for investors who borrow at high loan-to-value ratios. He has warned the banks that the clampdown could affect 80 per cent or higher mortgages. It's at this low-deposit end of mortgages where there has been a surge in business in recent years and is likely to affect investors' abilities to buy property on low or no deposit deals.
8. PROPERTY LAW BILL
The Property Law Bill is intended to replace legislation dating back to 1952, which has become obsolete. Many of the changes, which affect commercial property investors, include:
* Banks and other mortgagees will be required to notify "interested parties" such as friends or relatives who are guarantors before selling properties where the commercial investor has defaulted.
* The right to seize goods from commercial lessees for unpaid rent has been removed.
* Commercial tenants will be required to leave a property in good condition only at the end of their lease if it was in good condition at the start.
* A commercial lessee's liability for unintentional damage to leased premises when the lessor is insured is removed.
9. TRADER TAXING
In recent years the IRD has been given extra funds to track down tax-dodging property investors. The latest wadge of cash: $14.6 million allocated in the Budget is aimed at catching property traders. Steindle says investors who dodge tax, and many do, face penalties of up to 150 per cent of the tax owed plus interest.
10. UNIT TITLES ACT
The Unit Titles Act is due to be introduced to Parliament this year. Some of the proposed changes include removing the requirements on body corporates to reach unanimous resolutions, making information more readily available to purchasers, and establishing a dispute resolution service.
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