Property investors should be very wary about Government moves to ring-fence losses on holiday homes, says Andrew King, president of the New Zealand Property Investors’ Federation.
By Susan Edmunds
Minister of Revenue Peter Dunne has revealed that as well as limiting the percentage of losses that can be claimed on a holiday home in line with the amount of time it is available for rent, if the income from the bach is less than 2% of its value, the Government intends to ring-fence its losses, so that they cannot be offset against any other income.
King supported tax expert Mark Withers’ view that it could be the thin end of the wedge for ring-fencing.
King said: “The rule could easily be extended to the wider property investment community. Imagine the impact to your general property investments, especially as interest rates increase in the future and rental yields weaken relative to land values.”
He said it would be particularly bad for those who offered high-quality rental accommodation that produced a low yield relative to the property’s costs or Government valuation.
“This new proposal to ring-fence losses whilst only limited to baches at this point is not good news for the property investment community and investors should be wise to the risks of this change becoming wider in the future.”
Auckland Property Investors Association president David Whitburn said it seemed more likely that ring-fencing would be introduced than a capital gains tax.
“Labour and Greens could very easily stop erosion of the tax base by either having full ring-fencing of tax-losses or by limiting interest deductions to loans of say 70% of the property's valuation. I am not saying this is a good idea - but I understand ring-fencing is Green party policy and maybe Labour party policy.”
He said the ripple effect would be that rents would increase as some investors sold off their portfolios. “Then this gets compensated by increased Government assistance.”
But he said, in general, the property investment sector was no longer loss-making.