Capital gains tax will increase rental prices - expert

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Wed, 06 Jul 2011 10:48p.m.

Phil Goff is still refusing to debate what's leaked from his party

Phil Goff is still refusing to debate what's leaked from his party

By Josh Heslop

It's election year and tax policy is a big political issue, and now it's clear the two main parties are fighting over it.

“Nothing has changed, they haven't apologised, it's the same stuff they got thrown out for tax and spend,” says Finance Minister Bill English.

Next week, Labour will announce a 15 percent capital gains tax policy which will work something like this:

If a person buys a $300,000 investment property and sells it for $350,000, the profit of $50,000 would mean a capital gains tax of $7500 paid to the Government.

It's thought to be part Labour's plan to close loopholes for the rich and raise money.

However, National says it won't generate as much cash as they think.

“Labour say it will raise $4.5 billion, I actually think if they apply a rate of 15 percent if only raises $700 million a year."

But Phil Goff is still refusing to debate what's leaked from his party.

“I'm not talking about it until next week, I'm not commenting on speculation,” he says.

According to the property federation, there are around 200,000 property investors in New Zealand and they own 300,000 rental properties.

Mark Barret is one of them. He says property investors have already been hit by new depreciation rules, which cut cashflow, and a capital gains tax would be another blow

“The capital gain is the only thing that makes it worthwhile, if that's gone as well it makes no sense, it will make no sense for people to buy investment property,” he says.

The Property Investors' Federation says applying the tax only to rental properties would be a disaster.

“I can't see any good coming out of this at all, it's going to drive people away from owning rental properties, it's going to increase rental price of rental properties, which will keep tenants from being able to afford to get into a house of their own,” says the federation’s Andrew King.

Australia has had a capital gain tax since the mid 80's and experts there say it discourages people from buying and selling houses.

The typical property investor is someone aged between 45 and 60, who owns their own home, has paid off the mortgage, and has bought an investment property to provide for their future.

Labour's 15 percent tax won't apply to those whose parents die and pass on investment properties, and if marriages break up and properties are then cashed up.

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Comments

10 Jul 2011 08:18a.m.

Mike wrote:

Capital gains already taxable in NZ by the IRD if you trade.

The biggest cause of rise in rental prices has been a growing population and the resource management that has constrained development of new housing over the last decade.

A growing population, immigrants, this tries to fit more people into the same number of homes. Supply/demand means the price goes up.

If a capital gains tax is put on rental housing what will happen? Above it mentions 200000 investors for 300,000 houses, which on the scale on NZ is still small time investment. The average of that is 1.5 houses, and typically the average investor has a huge mortage on the house as unlike Joe Bludger the investor is able to work hard, and save on the same or less income - ie they aren't rich at all but because they are not bludgers they make bludgers look bad so Labour/Greens want to tax them out of existance.

If the capital gains tax is only when sell, then the investors just wont sell. Those 300,000 homes are mostly not short term buy/sell items. A rental housing investor buys the home, then holds on to it for a very long time, often till they die type lenght of time. So a capital gains tax when it is sold will mean properties wont be traded, ie avoid the capital gains tax.

If the capital gains tax is made on the property value, now the govt will have to go around valuing every property every 5 minutes to deem they are worth more so they can tax, ie at huge cost to NZ taxpayer ... Then what will happen? if they then put a cost onto the property investor, the investor will have to come up with cash to pay the tax, from the tennant. If the property goes up $50,000 and capital gains of say 15% charged - not hard with the housing shortage, thats $7500 more that will have to be charged to the tennant. Call it $150 per week charged on the rent required for the investor to pay the capital gains tax.

Labour/Green just want people to pay more in rent each week and be poorer.

08 Jul 2011 09:42a.m.

Ruz wrote:

I can't actually see the connection between rents and capital gains. Unless of course the Property Investors Association is suggesting that the real reason why its members acquire rental property is to generate a capital gain which makes them property speculators, not investors acquiring an asset to generate rental.

07 Jul 2011 09:03p.m.

AndrewF wrote:

Well said Brad! A well reasoned and informed opinion.

07 Jul 2011 08:58p.m.

Mike wrote:

what expert? the federation has its own agenda in this and I wouldn't take their opinions too seriously. Many countries have capital gain taxes of some sort so NZ is the odd one out. The matter of fact is part of the reasons NZ house prices have increased significantly in recent time is because there are people investing in properties creating additional demands for the housing market. The capital gain tax will drive some investors out of the market, effectively reduce some demand for properties hence reduce housing prices, which in turn is good for the average kiwi as buying a house will be more affordable. And the more people buying houses to live rather than to invest means that there are reduced demands for rental properties so chances are rents will have to fall instead of increase as the "expert" claims

07 Jul 2011 06:35p.m.

nigel wrote:

I CANNOT UNDERSTAND WHY rental will go up, its simple, if you have a rental or rentals you pay nothing unless u sell for a profit, if you hold onto it there is no problem, If your buying rentals to make money then its about time you pay a tax.

07 Jul 2011 02:51p.m.

Justice wrote:

Luke - how does a landlord create jobs??? what a load of rubbish, I think its a long over due, and besides these investors wont lose a cent until they actually sell the property, so for all the years they have it and over charged the rent payer they are still making money. And why on earth would the rents go up? a good property investor is in for the long haul, it will just weed out the so called investors that are out there to purely rip people off and run with the proceeds.

07 Jul 2011 02:26p.m.

pretty woman wrote:

at last a sign that property will finally go up.
for some of us homeowners ,sinse national came in prices have gone down as unemployment goes up. labour will be a breath of freshair as their kiwisaver was a godsend as was the cullen fund that is worth 20 billion.
national just borrow.

07 Jul 2011 02:14p.m.

Brad wrote:

Property speculators, those who actively trade in property by run down properties, doing a quick makeover and then on selling for higher price are already subject to tax on their profit which is deemed to be income in the year in which it is received. Those who declare this and pay tax are not the problem. It is those who do it and do not declare it need to be targeted by closer enforcement of existing tax laws.

Alien, I also agree with Mouthguard regarding GST. Most property investors (not speculators) are your 45-60 year olds who have finally paid off their own mortgage and invested in a single investment property. These people will not be registered for GST and so will not claim the GST on the purchase. If you mean speculators – then I agree, but then again, they are already captured by a CGT. They are simply someone wanting to build up equity in the hope of assisting them to achieve a retirement income above the minimalist one provided by NZ Superannuation.

NZ's house prices look great against countries which have a CGT & the existence of one has the effect of increasing prices, the reverse of what is intended. Why? Because a CGT is payable only if the house is sold and experience shows that there is a trend to longer term ownership with a CGT, reducing supply for resale. Investors already pay tax on depreciation recovered at time of sale and in fact from last year's budget onwards. The introduction of a CGT will make property investment even less attractive and will create a rental housing shortage, which will also lead to increased rents for those properties remaining in a reduced rental pool. It will also inevitably raise house prices - it's basic supply and demand.

Labour and the Greens seek to garner votes from those who envy their peers doing something to better themselves by portraying property investors as speculators. However, the irony is, the people they are really going to hurt are their own supporters!

07 Jul 2011 01:48p.m.

nick a wrote:

hahaha @Martin how many properties do you have? hahaha

07 Jul 2011 01:17p.m.

Al wrote:

If you make a profit, you pay tax... it's that simple!
Why should real estate investors/speculators be exempt from paying tax?
Are they special or something?