After reading this weeks extremely focused update from Economist Tony Alexander regarding the latest property taxation changes announced 9am Tuesday this week – He sums everything up in his concluding comments with this paragraph:
“What do you do now if you are contemplating saving and investing for your retirement? I strongly advise taking some time to calm down, then engaging an Authorised Financial Advisor (I am not one) to discuss your long-term wealth growing options. It will not at all be certain that your optimal route is to sell your existing rental property, or to refrain from purchasing one.”
Not that I wake up every morning, light candles, and bow down to the alter of Tony Alexander, but, oh my goodness, never has a wiser word been said…. Both in terms of seeking advice from an AFA (by the way, as of last week, we’re just known as a ‘Financial Adviser’ now), and in terms of staying the course with residential investment property.
Since Tuesday, I have literally spent hours and hours on the phone to Accountants, industry insiders, property experts, and clients, tabling these new changes, musing on our thoughts and predictions as to how this thing is going to play out…
One theme that came out from those many hours discussion was this lovely anti-climax:
We don’t have all of the answers, and we’re going to have to wait and see…
We won’t know 100% what all of the implications will be, or what the rules of the game are, or if there’s loop holes, or how new-builds are exempt, until sometime between now and October 1, 2021…… Boo hoo…. We want to know now right!? “Keep calm, and carry on” as they say..
As new-build property makes up close to 100% of what our clients purchase, we are intrigued to know how these changes will impact these investors, as our gut has always been that the government wouldn’t want to do anything to stymie properties being built. They want to increase supply!….
So – On that very subject, I was very intrigued to see that this was put up on the Labour Party’s website after their Tuesday announcement:
“If you invest in a new build property, you will be exempt from changes to the bright-line test and interest deductibility policy.”
And…. this is where the ‘wait and see’ part comes in… What do they really mean when they say “exempt”…. I believe it will likely mean one of two things:
- You will for all time have the ability to offset your interest costs against your rent if you purchase a new-build property or,
- In four years time, you will be just like every other investment property owner, and no longer be able to offset the cost of interest to your rental profit.
We will have to wait and see….
If it’s the latter, let’s do a little exercise to understand the impact (and this also applies to those who own existing rental property):
Let’s say you own a property that rents for $600 per week. That’s $31,200 per annum rent. Now let’s assume you have $600K debt on this property. At an interest rate of 2.5%, your cost for interest per annum would be $15K. Let’s also add in other costs like rates, insurance, property management, and maintenance of $8K. Under the new rules (phased in incrementally over 4 years), you’d no longer be able to offset that $15K interest cost against your rent of $31,200. You will still be allowed to offset the other costs of $8K.
Taking the cost/loss of $8K away from the profit of $31,200 is $23,200. If you were on a top tax bracket of 33%, you would have $7656 of tax to pay on that $23,200. Or, $147 per week……
If your property was cashflow positive, you could offset this against the $147 per week tax bill (most of our clients new properties at present are paying them on average about $100 per week). So, in this ‘dummy’ scenario, you’d be looking at a top-up of $47 per week – for example….
Let’s put some perspective on this….
Property in NZ over the last 50 years has done very close to 10% per annum, year on year capital gain…. Using the above scenario, and just purely working on historic averages, that example $600K property, would likely increase to $660K…. But, let’s be conservative, and chop that capital gain in half…. Now, it’s $630K….
Would you invest into something that cost you $47 per week, or $2444 per annum, to receive a capital gain of $30K?
Yip…. You would….
Now – the above obviously would change if interest rates crept up, which I don’t believe they will any time soon, and if they do, it will likely only be a small rise – but, I would wager, for most, it would still make complete economic/financial/retirement planning/investment sense!
Can you now see why Tony Alexander’s (arguably the most respected Economist in NZ) final wrap-up comment in his ‘take’ on these property taxation change was:
“What do you do now if you are contemplating saving and investing for your retirement? I strongly advise taking some time to calm down, then engaging an Authorised Financial Advisor (I am not one) to discuss your long-term wealth growing options. It will not at all be certain that your optimal route is to sell your existing rental property, or to refrain from purchasing one.“
If you fail to plan, you plan to fail – Seek advice from the right people – stay the course – and heed the advice given…
Keep cool peeps – You’re gonna be just fine! We’ll just have to ‘watch this space’ for now….
Chat soon….
Daniel Carney
Financial Adviser – Investment, KiwiSaver, Property, Mortgage