Ahead of its budget release, the Labour government signalled it will ban negative gearing.
The IRD released an issues paper on the proposed changes at the end of last month, with the removal of negative gearing coming amid a string of property reforms, including banning letting fees and extending the bright line test to five years.
Negative gearing in New Zealand is the process whereby tax losses from residential properties, particularly those owned by property investors, can be offset against other income – like salary, wages, or business income.
IRD proposes that the new loss ring-fencing rules will apply from the start of the 2019–20 tax year. Revenue Minister Stuart Nash clarified that the change would not preclude any solutions the Government’s Tax Working Group may come up with in relation to housing.
Are investors showing any signs of worry around their mortgage structures?
We don’t think many are as yet. We believe most investors don’t always buy a house with the intent of negative gearing – they may have 10 years ago – nowadays it’s also harder to get an interest only loan, as the banks are clamping down on it.
There is a gap, though, between mum and dad investors with one or two homes, through to professional investors with say six plus homes who run their rentals like businesses. Mum and dad investors should always work towards being able to pay off the principal as well as the interest to avoid running into trouble with cash flow. More seasoned investors tend to allow for market changes.
Concerns from the Property Institute
Ashley Church, chief executive of the Property Institute said he is concerned about the serious unintended social consequences of the proposal. Church said the change would deter “Mum and Dad type investors” from getting into the provision of rental properties because investors usually rely on those losses to get by when starting out, when the housing crisis requires there to be more rental properties.
National also expressed concern about the change. National Party leader Simon Bridges said: "We have to be careful we're not scaring off Mum and Dad property investors, just middle New Zealand trying to invest a bit.”
But in a recent survey the Auckland Property Investors Association conducted among its members to ascertain the favourability of various property and tenancy-related policies of the Labour government, removal of negative gearing was the 6th most favourable, behind relaxation of current LVR restrictions, longer fixed-term tenancies, the Healthy Homes Guarantee Act, extension of the Bright Line Test and limiting rent increases to once a year, ring-fencing tax losses, removal of 42-day notice to terminate, debt-to-income restrictions and a capital gains tax.
With the changes coming to investors, it’s a good time to look at your mortgage structure to see if you’re prepared for additional costs linked to negative gearing being abolished. As always, it pays to work with experts like accountants and mortgage brokers when you are investing to make sure you’re set up to meet any changing market demands.
If you need any advice, please don’t hesitate to give us a call on 0800 000 517.