No good outcome from ring-fencing losses
Stuart Nash announced today that “In conjunction with the recently announced extension to the bright-line test, ring-fencing losses from rental properties would make property speculation less attractive and level the playing field between property investors and home buyers".
It is assumed by many that rental property has a tax advantage. However Inland Revenue has consistently rejected this idea over many years. In their issues paper they state that "rental housing is not formerly tax favoured. Investment housing is currently taxed under the same rules that generally apply to other investments."
It is assumed that, because the mortgage interest costs of rental property buyers are tax deductible, they have an advantage over home buyers. This is not the case.
When buying a property, home owners get a home to live in while rental property providers get rental income on which they pay tax. Like any investment, expenses like mortgage interest are taken away from the gross rental income and tax is paid on the balance. Home owners do not have any income from their property and therefore cannot claim any tax deductions. The two situations are completely different. Rental property buyers do not have an advantage over home buyers and the playing field does not need levelling.
Ring-fencing rental property losses will simply make it considerably harder for people to provide rental homes for tenants. We are already seeing the consequences of policies which are driving rental property providers out of the market. It is no surprise that tenants are complaining that there are not enough rental properties, that rental prices are increasing and overcrowding is becoming more common.
A NZ Property Investors' Federation study into the cost of providing the average NZ home as a rental shows it currently costs $5,500 a year after all costs are paid, even with recent rental price increases and a cash deposit of over $50,000. If ring-fencing losses was introduced, this cost will increase to $9,000. This is an extra $67 per week.
This will put the industry into a lose-lose situation. If rental prices don't increase to compensate then the rental supply shortages we are experiencing will not only continue, they will accelerate. If rental prices do increase, tenants will face a mixture of financial hardship and overcrowding. There is no good outcome here.