Well, the new Government has been decided and in place for a little over a month now and they are quick to make a few changes in an attempt to take some heat out of the NZ property market.
So what has been proposed so far?
Here are the main proposals that will likely concern some investors.
1. Ban on foreign buyers of residential property (excluding Australians)
2. Brightline tax rule timeframe increasing from 2 years to 5 years
3. Removing the ability to offset property tax losses against personal income
So what sort of impact will these things have on us as property investors? Let’s look into each point and discuss a little further.
The ban on foreigners buying residential property doesn’t really concern me much at all, in fact, I think it’s a good thing long term. Many other countries prevent their land/property being purchased by foreigners and righty so I think. I believe in the long run we will end up with a more stable property market without the foreign driven speculation and any potential impact of a sudden withdrawal from our property market by foreign owners due to financial problems in their own countries.
The Brightline tax timeframe increasing from 2 to 5 years. Currently, if you as an investor sell your investment property within 2 years of buying it, you are required to pay income tax on any capital gains.
The Govt has proposed to push that time frame out to 5 years, so if you sell within 5 years you will be required to pay income tax on any capital gain.
I personally don’t see this as too much of an issue, as if you are a ‘trader’ of property, you are already required to pay income tax on any trading profit, as well as GST on the transaction anyway and have always had to do so. If you are purchasing an investment property to hold longer term for the income it generates then you will most likely be holding for greater than 5 years anyway. So another moot point in my opinion.
Removing the ability to offset tax losses from property against personal income. Now for some investors, this will be a real area of concern. Those investors that are either unaware of, or have chosen not to invest in positive cash-flow property, but instead, own property that doesn’t generate enough rental income to cover all of the ownership costs. Where the property owner needs to ‘top up’ the property from their own pocket. These property investors in the past have heavily relied upon the ability to claim the tax losses from their property holdings and offset it against their own personal income and receive a tax credit at the end of the year, thus helping to reduce their losses on their investment property/s.
If the Government remove the ability to offset property tax losses against the investor’s personal income then many of the people who invest in this way and own property that they have to top-up themselves will find that they can no longer afford to own those properties.
However this isn’t really a concern if you invest the way that we do (and train our clients to do) by building a high yielding positive cash-flow property portfolio, where there is more rental income generated than the ownership expenses and there’s a surplus rental income left over (passive income), then any removal of offsetting property losses against personal income isn’t really of great concern. As in this day and age with high yielding positive cash-flow property we don’t have any losses be it cash losses or paper tax losses anyway, so this is once again another moot point if you are investing in this way.
So the way I see it, really the only way forward for people wanting to invest in property from now on, is to do it exactly the way we have always done it. Nothing really changes, for us its business as usual. Investing in high yielding positive cash-flow property that generates a surplus rental income over expenses will now be more important than it ever was!
One tangible bonus to the Government implementing other means of keeping the property market in check is the RBNZ’s announcement of the gradual relieving of the LVR lending restrictions beginning January 1st 2018 which will be of help to us all, ok it’s only a small easing at this point but it’s a move in the right direction and every little bit of extra buying power we have is to be welcomed.
Personally, we are really looking forward to the overheated market softening further, as in previous cycles we have found it far easier to put together great deals and pick up some real bargains in slower markets when every man and his dog are not caught up in the hype of the market making crazy offers. Our time is coming to put our counter-cyclic investing into practice once again and take advantage of the many great opportunities that normally arise at this time, bring it on! Are you ready?
If you would like to discuss your concerns about the impacts of any of this on your investing feel free to drop us a line, or if you’d like to find out how we can help you get started investing in positive cash-flow property jump on one of our free training webinars.
Clint ‘business as usual’ Taylor