Merry Christmas, landlords

Ring-fencing of losses on rental properties is about to become law, as the bill’s first reading will go through the House before Christmas.

Stuff reports: quote.

A bill that will introduce ring-fencing of tax losses for rental properties has been introduced to Parliament and is likely to get its first reading on December 12.

It means investors who run a property at a loss will not be able to claim that against their other income.

At the moment, if a rental property costs more a year to own than it provides in rent, you can use the difference to reduce?your other income.

Many landlords use this as a way to help them hold properties long enough to benefit from capital gains, particularly when house prices are high compared to rents.

But the bill would instead require that the losses were only claimed against future rental property income.

The default will be for losses to be ringfenced within an investor’s property portfolio but they can opt to do it on a property-by-property basis instead.

The change would be introduced in the 2019/2020 tax year, rather than being staggered or phased in over a couple of years. end quote.

Rental losses are not what they used to be, and many properties make rental profits these days. But landlords who have bought properties relatively recently may have been relying on tax refunds to fund their properties, particularly where maintenance and upgrades are required by the government. Please note that rental property is the only area of business that is affected by this. If you have a small business on the side buying and selling items on Trademe, you can still claim any losses made. These rules apply only to rental property.

You know what that is, right? That is the supply of houses for tenants who cannot afford to buy their own property but the government can’t house. Yes, landlords provide a social service which assists the government, and yet they are kicked in the teeth time and time again. quote.

Investor Nick Gentle, who also operates property finding agency iFindProperty, said that was a problem.

“For whatever reason a lot of investors have negatively geared real estate. They’ve just had the rug pulled out from underneath them. With gradual rent increases and five years to put extra money into the mortgages, many people would have been able to make it work.

“Now they are faced with sell or suffer. Sure, exchanging tenants for home buyers means at a numerical level people still have a house so it kind of nets out but that’s statistics. At an individual level, tenants and their family no longer have a home and oops, there aren’t rentals any more in the leafy safe suburbs close to the schools they’ve always gone to.” end quote.

That is a good point. Houses in good suburbs are more expensive, and while they may be desirable to landlords because they attract better tenants, they are more likely to incur rental losses in the first few years. If a large number of landlords cut and run, as is expected, there will be virtually no properties in these areas for rent. quote.

He expected to see investors selling up in pricier?areas and using the money to buy cheaper houses, where the rent would go further to cover the cost of ownership.

“Which will push up prices in the regions more.” end quote.

Another good point. Rentals in small towns are more likely to make losses, as the rents charged are lower than in the cities. So as these properties are sold, rentals in small towns will be in short supply. In fact, this is already happening, and the ring-fencing-of-losses rules haven’t been introduced yet. Smaller towns often have poor quality housing stock, and landlords are already struggling with the costs of maintenance and insulation. The problem with rentals in small towns is that the rents just will not cover the maintenance costs – not for a long time anyway.

This is just more landlord bashing on the part of the government, because this move makes no sense from any angle. It punishes landlords for providing a social service, encouraging them to sell their properties now and take their considerable capital gains before the Tax Working Group takes those away as well. As always, however, it is the tenants that will suffer. We are seeing plenty of evidence of that already, and it is only going to get worse.