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Rents Could Rise on New Tax Break

Updated: Dec 21, 2018

Revenue Minister Stuart Nash's tax reforms, if they do go ahead, would see the introduction of "loss ring-fencing" rules which would stop people from being able to offset tax losses from investment properties against other income. At the moment, property investors can use losses on rental property to reduce their tax bill on other income if the rents in question do not cover costs. According to Inland Revenue, this situation currently affects 40 percent of New Zealand landlords, with the average tax benefit being $2000 a year.

According to landlord representative Andrew King, the cost of setting up and providing a rental home will increase from $5500 to $9000 per year if the new laws are passed, which is an extra $67 per week. As you might expect, these costs are likely to get passed down to renters themselves, a situation that could prove dire for renters who are already facing increasing prices and overcrowding due to reduced stock. If the situation for new-home buyers improves as a result of the new laws, renters would get hit twice as new buyers decrease the amount of affordable stock in key markets.

According to Inland Revenue, "Rental loss ring-fencing will reduce after-tax rental returns for some landlords. This could encourage the transfer of housing stock from investment housing (ie, rental housing) to owner-occupier housing, putting pressure on the remaining rental stock. On average, owner-occupied housing tends to have fewer people per house... This suggests that the transfer of housing stock from rental to owner-occupied may reduce the amount of housing available for each remaining renter unless there is an adequate flow of new housing onto the rental market. This may lead to increased rents. Landlords may also pass on their rental losses to tenants in the form of increased rents."

Despite rising costs for investors and potential problems for renters, the plan to end the tax break could also have a positive impact. According to Nash, "In conjunction with the recently announced extension to the bright-line test, ring-fencing losses from rental properties would make property speculation less attractive and level the playing field between property investors and home buyers... Changes would make the tax system fairer by ensuring that investors could not offset their losses on some property investments against their other income... The persistent tax losses that many property investors declare on their investments indicate that they rely on capital gains to make a profit."

Image source: Pixelbliss/Shutterstock

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