Nick Kearney: Labour's removal of rental tax write-offs would hurt small investors

Labour claims speculators can take losses from their rentals and offset that against personal income. Photo / Michael Craig

I was fascinated to see Andrew Little's speech to party faithful this week. The references to ending property speculation were intriguing.

The three policy elements involved bashing property speculators, but "mums and dads" saving for their retirement aren't going to be affected apparently.

According to Little, the first thing Labour is going to do is clear enough: It intends to ban overseas speculators from buying existing houses. That would make it unlawful for current property owners to sell to a non-New Zealand citizen, and appears discriminatory.

It isn't clear whether an overseas person buying property for reasons other than speculation is allowed to buy existing properties. There are many reasons overseas residents buy our houses, and speculation, I guess, is one of them.

Are the other reasons banned too?

The next thing Labour will do is to make speculators who "flip" houses within five years pay tax on their profits. That's not a new idea, as there is currently a two-year limit.

But it seems to turn genuine investors who buy for a relatively lengthy period of time into speculators. And they must be punished.

But it was the third announcement that excited me as a property lawyer, and as someone who has a working knowledge of tax arrangements for property development and investment.

Little announced, and I quote from his speech: "Labour will close the tax loophole that allows speculators to claim taxpayer subsidies for their property portfolio.

Right now, speculators can take losses from their rentals and offset that against their personal income. It allows them to avoid paying tax.

This loophole is effectively a hand-out from taxpayers to speculators. It gives them an unfair advantage over Kiwi families."

He thumped his chest and exhorted that the "loophole" is over.

In an attempt to appease Waitakere Man, he softened the message by excluding the "mum and dad investor who has bought a rental as a long-term investment" because "the vast majority of them don't use this loophole."

I was reading this speech while watching a replay of the Warriors capitulation at the hands of Penrith, and right about now my pain doubled.

Surely Little was referring to investors who claim tax losses on their rental investment properties, not speculators.

It had to be, because I have never come across a property speculator who claimed a tax loss against their rental investments.

The two are mutually exclusive. Speculators are not investors, and vice versa. Indeed, the law prohibits speculators from claiming tax losses against personal income as these losses are ring-fenced. They are currently liable to pay tax on their gains, whether sold within two years, or more.

So I read more of his speech. Was it meant to hit large-scale investors who continually use equity to buy more properties and accumulate tax losses? It seemed not.

Little continued by saying the policy "is about the big speculators who purchase property after property. It's about those big-time speculators who are taking tens of thousands of dollars a year in taxpayer subsidies as they hoover up house after house."

Speculators two, investors nil.

Who wrote this speech? Surely the actual policy would clear the matter up. Alas, I shouldn't be so optimistic.

Labour's website had the policy on it the very next day. Now I'm experienced enough to know that political rhetoric is just that. It is meant to appeal to a room full of nodding heads. The actual policy contains the meat and gristle. Or it should.

The start was encouraging. It said: "Losses from rental property investments will be ring-fenced." That's better. It hits the proper target. Labour had finally hit the right nail.

But the nail went into rotting wood. Because with the next smack it said: "Speculators will no longer be able to use tax losses on their rental properties to offset their tax on other income, a practice called negative gearing."

Oh dear. Maybe they just rushed it. I'd better read on.

"The biggest users of this loophole are large-scale speculators who own multiple rentals and use losses on new acquisitions to continually reduce their tax."

Most, no all, of my clients use rentals as long-term investments, not for short-term speculation. I have some who are in their early 20s, and they understand the difference between the two.

My incredulity was almost over, or so I thought.

Yet the best was yet to come. According to Labour: "Ending this loophole will not affect most people who have bought a single rental as a long-term investment because most of them are not using it. Those that do use this loophole generally only do so for a few years after purchase."

There are so many errors with this statement, it needs another column to explain them all. But as a sweetener, I can confidently state that most long-term investors are using the alleged "loophole".

It's not a loophole as such, it's applied across the board to every investment, whether it involves property, or not.

All of this was a shame, because some of Labour's housing policy has a lot of merit, particularly the parts around removing the rural urban boundary to enable houses to be built.

But that good part is never the subject of attention. Instead, months will be spent dissecting the anomalies referred to in this article.

If Labour wants to form a government, it will need to sharpen up on the difference between the two most basic terms of speculation and investment.

As the Warriors game ended, I thought of the similarities between that team and Labour: Both have very loyal supporters who refuse to give in, but winning requires a plan, and one that will actually work.

• Nick Kearney is an Auckland lawyer specialising in property. He holds a Master's degree in law from Auckland University and has been a candidate for the Act Party at previous elections.