Real estate, post level 4

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#2679282 23-Mar-2021 14:17

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.

100%. IANAL but could that constitute an out? A material change so to speak? If not, then yes that's tough and should have been considered even if it was a Regulatory change or Statute that made the purchaser able void the signed but not completed contract. Lawyers phones red hot today I imagine

Read what @esawers wrote, just ever so slightly more info than mine.... :-)

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eracode

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#2679285 23-Mar-2021 14:24

esawers:

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.

When a property is acquired

For tax purposes, a property is generally acquired on the date a binding sale and purchase agreement is entered into (even if some standard conditions like getting finance or a building report still need to be met). Full information on when a property is acquired is found in QB 17/02 on taxtechnical.ird.govt.nz

For the purposes of the changes outlined in this factsheet, a property acquired on or after 27 March 2021 will be treated as having been acquired before 27 March 2021, if the purchase was the result of an offer the purchaser made on or before 23 March 2021 that cannot be withdrawn before 27 March 2021.

OK so there’s some technical stuff around the dates that might move them a bit - but surely the generality of what I’m saying is correct. Investment decision made under one set of deductibility rules then the rules quickly change before you can re-assess the decision and you’re locked into it.

Sometimes I just sit and think. Other times I just sit.

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#2679286 23-Mar-2021 14:29

I don't understand how they can make interest on an investment property non-deductible. Expenses used to generate a profit should be deductible from that profit before tax owing is calculated. This introduces one rule for a particular expense but different rules for other expenses?

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

networkn

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#2679289 23-Mar-2021 14:34

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.

eracode

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#2679290 23-Mar-2021 14:35

Senecio:

I don't understand how they can make interest on an investment property non-deductible. Expenses used to generate a profit should be deductible from that profit before tax owing is calculated. This introduces one rule for a particular expense but different rules for other expenses?

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

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

Sometimes I just sit and think. Other times I just sit.

GV27

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#2679292 23-Mar-2021 14:42

eracode:

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

The tax system is full of this kind of stuff- employees can't claim things contractors can. Home owners can't claim anything, even if they buy the exact same house that was formerly triggering allowable deductions as a rental. We tax some things on an unrealised or deemed basis and other things on an actual basis. The tax system has never been consistent in this regard.

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#2679293 23-Mar-2021 14:44

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.

You're also going to be potentially stuck if you own a rental you want to sell soon-ish, as selling it becomes more difficult as buyers will probably be coming in with a higher debt:equity ratio and no phase out period. Their potential net return just dropped significantly.

So if the investor has a $400k mortgage on a $600k property financed at 3.5% = $14,000 / 33% = $4620 per annum loss of "negative gearing income" from an investment that might return $25k gross, that's a big pay cut.

Long term as interest rates "normalise" this is going to mean a big shift.

I'll start counting the days/months/years maybe until holes start getting poked in the policy to facilitate more investment in new rental property developments.

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#2679294 23-Mar-2021 14:47

Senecio:

I don't understand how they can make interest on an investment property non-deductible. Expenses used to generate a profit should be deductible from that profit before tax owing is calculated. This introduces one rule for a particular expense but different rules for other expenses?

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

If you were in a "real" business, so were paying tax anyway, you pay tax on the capital gain as a matter of course. Standard business. But if you use Brightline as the escape route you dont pay capital gain tax if you sell after the period, so why should you get a tax rebate for the interest incurred to buy the capital gain? Thats another way to look at it. End of the day they don't want businesses playing with homes. Invest elsewhere and stop artificially increasing house prices

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#2679297 23-Mar-2021 14:50

Fred99:

You're also going to be potentially stuck if you own a rental you want to sell soon-ish, as selling it becomes more difficult as buyers will probably be coming in with a higher debt:equity ratio and no phase out period. Their potential net return just dropped significantly.

So if the investor has a $400k mortgage on a $600k property financed at 3.5% = $14,000 / 33% = $4620 per annum loss of "negative gearing income" from an investment that might return $25k gross, that's a big pay cut.

Many got caught by houses rising, now that's caused many to get caught by houses reducing, based on the measures to stop the initial problem?

Or leave it, and one day it all goes POP in a big way, maybe better to draw a line and lessen the carnage?

GV27

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#2679300 23-Mar-2021 14:55

tdgeek:

Or leave it, and one day it all goes POP in a big way, maybe better to draw a line and lessen the carnage?

A structured reset and path back to 4x incomes (e.g. state subsidised owner occupier mortgages for those facing negative equity) will make us far better off in the long run than pretending we can be productive by selling houses to each other.

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#2679315 23-Mar-2021 15:08

GV27:

tdgeek:

Or leave it, and one day it all goes POP in a big way, maybe better to draw a line and lessen the carnage?

A structured reset and path back to 4x incomes (e.g. state subsidised owner occupier mortgages for those facing negative equity) will make us far better off in the long run than pretending we can be productive by selling houses to each other.

Its been fine for a long long time. If you dont build, immigrate, and if interest goes to near zero, yes this can happen. Its been fine before. The wealth that has built up is real, it can be spent, you can't pop that.

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

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#2679318 23-Mar-2021 15:12

ANY change to the current environment will upset someone with a vested interest in the housing market. New Zealand is the most-leveraged country in the developed world for housing debt and when you read stories of investors leveraging up for multiple house purchases (one recent Stuff article: 10 house purchases over five years, five of which were in 2020), something had to change.

networkn

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#2679321 23-Mar-2021 15:15

dafman:

ANY change to the current environment will upset someone with a vested interest in the housing market. New Zealand is the most-leveraged country in the developed world for housing debt and when you read stories of investors leveraging up for multiple house purchases (one recent Stuff article: 10 house purchases over five years, five of which were in 2020), something had to change.

Who would have been upset had the Government of instead, heavily incentivised first home buyers, if they built instead of bought?

Fred99

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#2679322 23-Mar-2021 15:16

tdgeek:

Many got caught by houses rising, now that's caused many to get caught by houses reducing, based on the measures to stop the initial problem?

Or leave it, and one day it all goes POP in a big way, maybe better to draw a line and lessen the carnage?

Economists have been warning about this happening for decades, but it's never happened yet.

It does get alarming though when "property investment" discussion starts to dominate dinner party conversation, just like share clubs etc did back in about 1986 when a pack of crooked Kiwi business icons seemed as if they could only ever keep winning, and every single warning about how most of them were houses of cards were laughingly dismissed as being pessimistic doomsaying.

I suspect that the removal of negative gearing will be the issue that costs Labour the 2023 election. It's kind of inevitable that there'll be a huge outcry from conservative politicians, business leaders, and "boomers" many of whom own multiple rental properties and negative gear them against high incomes.

Damn, unearned passive income accruing at 10x background inflation rate was what was going to keep us rich in our dotage, except for the losers of course.

Senecio

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#2679323 23-Mar-2021 15:16

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!

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