Invest in a rental property, form an LAQC and reduce your personal tax. Little wonder so many are doing it.
In addition, it does not end there, the door is wide open if one is switched on as they can ring even more benefits out of the system by moving figures from one column to another and it is legal.
In fact, I encourage it and why not. My job as a Property Consultant is to advise and recommend what I believe is in the best interest of my clients. I don’t make the rules.
For example, say you had a personal loan of $150,000 with 15 years to run at 7% and you purchased an investment property for $350,000.
You should not investment in property solely for the tax benefits hoping one day the property will increase in value and there will be some capital gain down the track. Your intention from day one should be to pay down the debt.
But that will lessen the tax benefits I here you say.
Not necessarily.
$350,000 over 20 years @ 7% = $2,714 monthly
$350,000 interest only @ 7% = $2,042 monthly
The difference being $672.
Rather than lessen your tax benefits you could leave the investment loan on interest only and increase the payments on your personal loan by the difference.
This would not affect your tax benefits but would save you $45,535 on interest payments on your personal loan as by doing so you would reduce your loan term from 15 years, to eight years and two months. Then, you could start chipping away at your investment loan.
Where things go wrong and get a little pear shaped is when the lotto mentality kicks in. If we keep buying, one day we will win.
Although property values do over time increase, they like any industry, sometimes fall on hard times. And should you need to down size then, well it’s most likely to be at a loss.
And that is my point, if people paid down debt rather than creating more and more debt, buying more and more property without paying it off I wouldn’t be writing this.
However, as many if not most people running property investment seminars promote negative gearing [interest only loans] I feel it would be in everyone’s best interest to at least make some adjustments to the system.
Why Bill English has not simply pulled the plug and said “NO MORE” is beyond me. To encourage and reward anyone to set up a company to make a loss is probably not advisable and, who is funding the reward.
I think a better idea would be to go back to running property investment companies under the same rules as before, a limited liability company whereas the company can still write expenses off but is encouraged to make a profit and pay taxes.
At least, stop allowing people to mark time with interest only loans and/or negative gearing and instead insist the lending be principle and interest so as the debt is reducing.
I would like to hear your views on this one.
Brian Dalley is a leading Property Consultant | former NZMBA Mortgage Broker, and Real Estate Agent.
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