Thursday, June 21, 2007

Property investors' tax breaks may go

This may well be the trigger to cooling off the hot property market.

Jun 20, 2007

Finance Minister Michael Cullen is considering scrapping tax breaks available to property investors in a controversial bid to cool the runaway housing market.

Peter Trapp is one of the 200,000 Kiwis with a rental property and always has his eye out for a good property deal.

It can be lucrative. Even if you lose money on the rental property you're eligible for tax breaks. Trapp says that's fair enough.

"All businesses should be able to claim on expenses and pay taxes on the profits," he says.

Here is how the current system works. Supposing you earn $100,000 a year and buy a rental property. If the rent you're getting doesn't cover your mortgage and other bills and you say make a loss of $20,000, you can offset that against your income. So you wouldn't be taxed at $100,000 but at $80,000.

Those incentives mean rental properties are popular. Back in the early 1990s when those tax breaks were not available, just 70,000 people owned rental properties. Now about 200,000 New Zealanders do.

"It is a massive increase in investment into rental property which has placed further pressure on the property market," says Cullen.

Now the government is considering pulling the plug on landlords' tax breaks to stomp on the rampant housing market, although National says that will force rents up and hurt mortgage holders already facing high interest rates.

"Why isn't he satisfied with that impact on their pockets and their house values without adding another measure which may have the effect of pushing their house values down," says Bill English, National finance spokesman.

Others believe the government is picking the wrong target.

"The housing market is over heated because as I have been telling you for the last 13 years, we have inflated the demand by sending half the immigrants to this country to Auckland," says Winston Peters, New Zealand First Leader.

Cullen stresses it's just an idea at this stage and will need majority support in parliament.

"Not much point doing lots of work if you haven't got 61 votes. That's the nature of MMP politics," he says.

That is 61 votes property investors will hope Cullen doesn't get. They say renting will become even more expensive if the government goes ahead with the change.

Property Investors Federation vice-president Andrew King says the move is not necessary as the property market is already nearing the top end of the cycle. He says the government doesn't need to do anything to reduce property price growth as affordability is doing that on its own, as is the fact fewer immigrants are coming into the country.

King says putting investors off will cause rents to rise as there will be fewer properties available.

The issue involves Loss Attributing Qualifying Companies (LAQC) which are used to reduce tax when rental properties make a loss. Click here for an explanation of an LAQC.

Information on current rental prices and how they have changed over four years can be found at Crockers Property Group.

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