Real estate, post level 4

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Mad Scientist
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#2679333 23-Mar-2021 15:30

Wait a sec... I thought you can't deduct interest from personal taxes anyway.

So this is aimed at the big time investors who have set up companies?

Nevertheless an excuse for raising debts regardless.

tdgeek

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#2679334 23-Mar-2021 15:33

Senecio:

tdgeek:

Can you explain how we can turn todays houses into a 4 x ratio? Allow the POP and go from there?

A minimum wage equal to $250k will do it, simple!

Finally, a decent plan!

GV27

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#2679339 23-Mar-2021 15:38

tdgeek:

Can you explain how we can turn todays houses into a 4 x ratio? Allow the POP and go from there?

Create the pop, give owner occupiers a soft landing through low-interest state-backed mortgages, bring in aggressive DTIs etc.

Basically you still need people to spend some money once things have unwound and I'd rather that be owner-occupiers than the people that got us into this mess. Investments have risk.

Fred99

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#2679347 23-Mar-2021 15:47

Batman: Wait a sec... I thought you can't deduct interest from personal taxes anyway.

So this is aimed at the big time investors who have set up companies?

Nevertheless an excuse for raising debts regardless.

No. People buy and run rental investment property as a business for that (negative gearing) reason, even the "Mum and Dad" investors with one rental property.

Handle9

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#2679367 23-Mar-2021 16:04

networkn:
Senecio:

Sounds to me like a sneaky alternative to introducing a CGT to me.

It is a CGT. It's like when they said "no new taxes" but instead increased existing taxes.

You're talking about John Key, right?

Batman

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#2679374 23-Mar-2021 16:10

I'm a bit lost of this ... I'm pretty sure there was a ruling that rental losses were no longer able to be deducted from personal taxes.

So this is something that doesn't affect personal taxes but company taxes?

Handle9

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#2679377 23-Mar-2021 16:13

Batman:
I'm a bit lost of this ... I'm pretty sure there was a ruling that rental losses were no longer able to be deducted from personal taxes.

So this is something that doesn't affect personal taxes but company taxes?

It effects all taxes. Previously the interest deduction was ring fenced so it couldn't be used to offset your personal taxes. Now there is no deduction at all.

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GV27

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#2679379 23-Mar-2021 16:17

Handle9:
Batman:

I'm a bit lost of this ... I'm pretty sure there was a ruling that rental losses were no longer able to be deducted from personal taxes.

So this is something that doesn't affect personal taxes but company taxes?

It effects all taxes. Previously the interest deduction was ring fenced so it couldn't be used to offset your personal taxes. Now there is no deduction at all.

Nor does it accumulate for you to offset against a future brightline obligation, is my understanding.

Batman

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#2679381 23-Mar-2021 16:20

we'll know if it works in a few months I guess.

and don't believe the economists ...

this time last year they predicted a housing crash and nek minit ...

mattwnz

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#2679390 23-Mar-2021 16:27

Zeon:
So I just did a calculation for my partner who owns a rental property. With the interest deductability removed she will need to pay another $7,000 per year on tax. Guess who will be getting a big rent rise to cover that......

Can't they still get it if it is a new house? This change is supposed to try and get investors investing in new houses, and leveling the playing field on existing homes for first home buyers who can't get those tax breaks. It was interesting that GR said that this was loophole they were closing.

I somehow can't see a flood of houses flooding the market as a result of this, and they have been talking about this sort of change for a long time so investors should have had some inkling something like this would happen eventually. 40 percent of sales to investors shows how attractive housing investment and speculation was, and it caused the market to go crazy. But IMO this is just a start and may not make much difference. But it could increase rents.

antonknee

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#2679393 23-Mar-2021 16:35

eracode:

Totally agree - it’s not logical and introduces a major distortion into the tax regime.

It's perfectly logical in the view of trying (on the demand side) to mitigate a housing crisis....

Also the tax regime is already distorted in favour of housing investment (arguably a big part of how we got in this mess), so what's another distortion on top?

MileHighKiwi

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#2679399 23-Mar-2021 16:38

I was thinking about our first home today, purchased for $300K in 2009 in Upper Hutt. We sold it for $530K 3 years ago. Today it would probably sell for around $715k based on recent sales. It's still a 'first home'; 3 bedroom, 100m2 house on a 700m2 corner section, 1960's build, solid yet unspectacular. Back then we needed $60K as a deposit and borrowed $40K from family, today that young couple would need $140k. Impossible for so many. In Upper Hutt you can't find a house for less than $600K, you're looking in the $700-$800k range to buy a house equivalent to what we bought in 2009. It's mental that a young couple needs to spend almost 3/4's of a mil to get a 'first home' in Upper Hutt.

I'm yet to see a radical idea on how you get prices back to a reasonable multiple of household income (e.g. 3 as the gold standard), without causing people to lose hundreds of thousands of dollars in the process, and their lives in many cases.

Ultimately we need to lower the cost of land and building supplies but in the process some people will take a bath. How do we protect those people while making the structural changes required? It can't keep going on like this.

antonknee

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#2679401 23-Mar-2021 16:41

mattwnz: Can't they still get it if it is a new house? This change is supposed to try and get investors investing in new houses, and leveling the playing field on existing homes for first home buyers who can't get those tax breaks. It was interesting that GR said that this was loophole they were closing.

I somehow can't see a flood of houses flooding the market as a result of this, and they have been talking about this sort of change for a long time so investors should have had some inkling something like this would happen eventually. 40 percent of sales to investors shows how attractive housing investment and speculation was, and it caused the market to go crazy. But IMO this is just a start and may not make much difference. But it could increase rents.

Correct. For new builds, the brightline test is five years. Additionally, there is an exemption for deducting the interest on loans used for new build residential properties.

antonknee

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#2679406 23-Mar-2021 16:46

eracode:

So, if you contracted recently to buy a house that you are going to rent out, with the purchase being settled on, say, 29 March (27 is Saturday) - you would have based your investment decision on one set of rules (interest deductibility) only to find the carpet whipped out from under your feet by a new set of rules (interest non-deductibility) and you’re stuck with a very different regime.

Surely some period of lead-time could have been allowed.

How long of a lead time? Like where do you draw the line?

Businesses often deal with material change brought on by the regulatory regime, the market they operate in, their investors, and a million other factors. I'd argue if it was only a workable business based on a tax writeoff then it wasn't really workable. With any investment and any business comes risk, property in NZ is a weird phenomenon in that it has been essentially risk-free for so long.

I am not interested in sympathy for "mum & dad investors" in this situation. Mum and dad with an investment property are running a business whether they like it or not.

As another poster has pointed out, anyone investing in property at this point has to have been well aware changes were coming (albeit no one has a crystal ball to foresee exactly what that change may be).

snowfly

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#2679412 23-Mar-2021 16:48

I'm in two minds about the removal of interest deductions.

On one hand I can see the possible intention of helping first home buyers (but as others have said, costs may just be passed on as rent increases).
And on the other hand (as a owner of a rental property), I'll be watching things very closely over the coming months, to see how these changes effect me.

We only have 1 rental property, BUT, we are right in the middle of subdividing it and building a new rental house on the front half of the section, thus providing 2 rentals. (the new build is about 1-2 months away from being complete).
We're probably the typical 'mum and dad' type investors, with just 1 or 2 rentals, in the for the long term, investing for our own children's future.

Hence I'll be keeping an eye on what happens for new builds, will our new build still be interest deductible, or not?

Should we sell the existing house and keep the new build? (as new build may have better return than older house)
Could we just refinance the mortgages (paper shuffle), and move the back house mortgage onto the new house mortgage (which is interest deductible) - to take advantage of claiming interest?
Could we start up a limited company, move houses into company, and the company (as a business) still can claim interest? (I can't see where it says company interest is being changed???)

Lots of questions, and once things become clearer we will be sitting down with our accountant for the best approach, without having to raise the rents too much.

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