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What tax changes mean for you - 9th Mar 2018

What tax changes mean for you

It’s that time of year when you start thinking about tax returns and the financial year ahead in terms of your residential property portfolio. The proposed tax changes that will affect residential property investors include ring-fencing losses, extending the bright-line test from 2 years to 5 years and potentially the introduction of a capital gains tax.

How and when will changes be implemented?

Currently, there isn’t yet any policy in the pipeline so it’s difficult to speculate on when exactly these changes will occur. However, the bright-line test appears to be the top priority and may start being enforced in the coming months.

Ring-fencing losses

If introduced, this means that losses on rental properties will be ring-fenced and therefore will no longer be able to be used to reduce the tax that speculators owe on other income sources. NZPIF executive officer Andrew King says studies show the top-up cost of owning the average rental property sits at around $6,500 each year. If ring-fencing is introduced that cost will go up to around $10,000. The government has indicated they intend to phase the policy in over 5 years.

What can investors do?

Withers from Mark Withers says getting rents up to a level where you’re either breaking even or are positively geared is something investors will be able to do.

What’s the market impact?

The changes may force investors out of the market and reduce supply of rental properties. The new tax law might actually focus investors on the economic returns their properties are producing and cause them to streamline their portfolio.

Who will be affected?

It will have the largest effect on those trying to become investors or those which have negatively geared their property, because they don’t have the ability to streamline their portfolio.

Extending bright-line to 5 years

This might, ironically, restrict supply. Experts suggest that it may create a lock-in effect. If you sell, you pay tax, if you don’t, you don’t pay tax. It works like an incentive to never sell and property becomes tightly held.

Capital gains tax

In other OECD countries, capital gains tax is at your marginal tax rate (33%) and affects all types of gains, from property to vehicles to artwork. It may mean that when it comes to property, a buyer’s tax is introduced also, in which case you’d need cash for. Other countries place this tax at 5%.

What do I need to know?

The day a capital gains tax is introduced is when all housing stock is given a value. If you don’t get your own valuation it will be a Government valuation or current valuation. So, if the CV on your property is $1,000,000 but the market value is $1,700,000 then it’s very important to get a market valuation so that the cost basis for your capital gains tax, when you sell, is fixed at the higher value.

Note: Information and quotes have been obtained from the experts featuring in this month’s Property Investor Magazine.

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