You could be smoking crack or selling babies on eBay, but no this is way, waaaaaaaay worse – you’re a property investor! All your non-property investor friends think you’ve run off and joined a cult, your uncle thinks you’re insane for borrowing that amount of money, and the only one excited is your mortgage adviser!!

Putting aside your views on the morality of property investment for just a wee moment, let’s assume you’ve quietly been preparing diligently for your retirement via property investment. 71% of people recently surveyed (by us) believe property values will increase in value at the same historical growth rates (that’s about 10% pa Auckland!). 49% of the same people are keen to get at least one more rental – so whilst this is quickly becoming a taboo topic, it doesn’t change the fact that many would still like a piece of the action!

Property investors do well, primarily in two ways:

  • If the property increases in value over the years, the resulting capital gains are applied to another purchase or realised when the property is sold.
  • If a property generates a ‘loss’ (ie the rental income doesn’t cover all associated holding costs (like the mortgage)), then that ‘loss’ is applied to your taxable income (ie you pay less tax).

So property investors historically have paid less tax whilst they’re holding something that can provide a tax-free gain. No wonder it’s been so popular and no wonder why the IRD wants to snatch away some of this low hanging fruit!

Well, if you’re a property investor, or you want to be one, you need to read on, as changes are coming that will most likely affect your position with the IRD. You may or may not be completely up to date with the proposed changes that could decrease the practice of paying less personal tax while holding rental properties. This will likely be law in a couple of years. Will this be the straw that breaks the back of many newbie property investors? If losses incurred from property investment cannot offset other taxable income does it still make sense to grow wealth via property??

 

What about capital gains tax – yes, this is already a thing in NZ but it’s been branded ‘the bright line test’ and it’s a beautiful bit of marketing and PR I must say! Previously 2 years, this has also recently changed to 5 years and should be factored in before considering a sale or even changing the ownership of a property.

 

Tax specialist Karl Moreton from Lock & Partners was interviewed by Darcy Ungaro recently on NZ Everyday Investor to discuss and explore the impact of some of these [proposed] changes. Burying your head in the sand is not an option here if you currently hold, or are thinking of holding property. No one loves getting a lecture by the tax man, so we’ve made this a palatable bit of content for you to consume in just 41 minutes. Go on, get up to speed now on something that is highly likely to have an impact on your next move with property. Be sure to subscribe to NZ Everyday Investor while you’re there!