Ring-Fencing Rules Could Lead to Fewer Rental Properties and Higher Rents

With the pending changes coming through in regards to residential investment properties and the tax implications, here is what you need to know.

New Zealand landlords currently enjoy tax advantages from negatively gearing their properties and saving on expenses in their tax returns. The IRD states that investors suffering losses on their rentals are currently getting tax breaks of $2,000 a year.

It is commonly known that Residential property investors can use losses on their rental properties to offset the tax they need to pay on their other sources of income - wages, salaries, business income, etc. Types of expenses could be travel for landlords, repairs, cleaning, gardening and lawn mowing.

However, the Taxation Bill, seeks to alter this. If passed, a residential property investor will only be able to offset deductions against income from their property portfolio.

The aim of the proposed law change by the current government is to level the playing field between property speculators/investors and owner-occupiers. In conjunction with the extension to the bright-line test, ring-fencing losses from rental properties it is all compounding to ultimately make investing in property (or holding an additional property to the one you privately live in) less attractive.

For the landlords looking long-term, you have less to be concerned about and more to gain from potential shortages in rental accommodation which will more than likely push rents up even further. It is already known that there is a shortage of properties nation wide, in Dunedin alone it is predicted that there are 1000 properties needed to keep up with predicted demand.

Early last year Inland Revenue and MBIE advised the Government that ring-fencing losses would result in the sale of an unknown number of properties to owner-occupiers, reducing availability of rentals and increasing rents by around 10%.

Therefore, the Government may unwittingly create a further shortfall of rental properties by implementing these new rules relating to the ring-fencing of rental losses as some negatively-geared owners will get out and sell.

If you are facing the decision about selling or not, remember there is a substantial benefit for those landlords that hold their properties as rents stand to increase with this potential further shortfall of rental properties.

At Click Property Management we have seen a definite decline in rental properties advertised for rent - coupled with an increase in demand by tenants. For example, comparing January 2017 to January 2019 we have seen a 153% increase in the submission of applications by tenants with market rent increasing from $364 per to week to $407 per week. All properties that we manage are carefully monitored and rents are reviewed regularly to ensure that our property owners are maximising their investment and aware of the current market - pertaining to your own personal property.

It may be worth speaking with your accountant or trusted advisor to ensure everything is structured in your best interest for the pending changes.

If you are unsure what to do about your property, what market rents should be and the pros and cons of property investment in Dunedin, you are always welcome to get in touch with Ashley our Business Development Manager.