Not hard to understand why so many are doing it and why so many are opposed to it.
The opposing sides will both have their time in the sun as seasons change but they will never agree, as when one is in the sun the other sits in their shade.
Let us first deal with an LAQC as that may very well be the direction in which the axe swings, and this time it will.
What is an LAQC - it is a [ Loss Attributing Qualifying Company ] basically the same as a Limited Liability Company except for one aspect which is the very reason for so much controversy. [A business loss can be offset against personal tax]
Even when the investment property increases in value, if there is a paper loss, that loss can be offset against your personal income.
For example you may have an investment property that has increased in value by say $30,000 but you made a loss on paper of $20,000 [ interest, depreciation, maintenance etc ] you can still claim the loss against your personal tax.
John the owner of the investment property earns $100,000 but after deducting the paper loss of $20,000 only pays tax of $19,950.
Peter earns the same amount $100,000 and is taxed $27,550.
The person with $500,000 on term deposit pays tax on the interest they earn. Their money essentially funds the investors.
I guess everyone just wants a level playing field. Well except for property investors, they are happy with the status quo and in all fairness, why wouldn’t they be, they didn’t make the rules. Property Investors are not the bad guys here.
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 off legitimate expenses [ but not against personal income ] and is encouraged to make a profit and pay taxes.
At least, stop allowing people to mark time with interest only loans. Instead, insist lending be ‘principle and interest’ so the debt is reducing.
With one very simple rule change and we could start reducing our national debt within days. [VERY IMPORTANT – PLEASE READ AGAIN] intended for politicians.
An investment client questioned me yesterday as to why I do not highlight tax benefits as part of my presentation. I never do I replied, tax benefits should be treated as icing on the cake. Primarily it should be about affordability, then a raft of other factors but essentially, let’s be realistic, it’s about making money.
Will residential property investment still be on top of my list if the axe falls on the tax benefits of an LAQC? The answer is a resounding yes!
If implemented what impact would such a change have on tax revenue? – It certainly will not be the magic pill but it will ease the headache a little.
What impact will it have on the real estate markets? – Very little, but I imagine some of the big players may look at downsizing.
Unfortunately such a change will not silence everyone but should clear the air a little as even many of those that cry foal when it comes to tax, agree residential property can and has proven to be, an investment worthy of consideration.
Brian Dalley is a leading Property Consultant | former NZMBA Mortgage Broker and Real Estate Agent.
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