Real estate investor prepares for additional tax bill of $ 45,000
Real estate investor Graeme Fowler says he expects to pay an additional $ 45,000 per year in taxes when the new rules take full effect.
The government announced last month that it was introducing a series of changes designed to “tip the balance” of the housing market towards first-time homebuyers, including an extension of the clear line test to 10 years.
Another change removes the ability of investors to deduct interest on loans as an expense. So far, investors have been able to reduce the tax they pay on their rental income by offsetting this income with the interest earned on their home loans.
There will likely be exemptions to both modifications for newly constructed properties.
Fowler, the author of 20 rental properties in one year, and the owner of about 55 residential and 14 commercial rentals, said the changes could affect his plans.
“The only change that could potentially cost investors a lot of money is the elimination of the interest claim. The government calls this a ‘loophole’ which is very misleading and false, ”he said.
“It has never been a loophole and interest has always been claimable, as it is with any other business loan and always will be on all commercial properties. They identified the home loan interest claim and then called it a loophole. “
He said about 40 percent of his debt was on residential property and the rest on commercial property.
“The residential portion of interest currently paid is $ 130,000 per year or just under $ 45,000 per year more in tax when the new rule takes full effect,” he said.
“This will be phased in over the next four years assuming National is not voted on the next time around and reverts to what it was, which just might happen.”
He said his strategy had been to buy properties and pay them off as quickly as possible, which would serve him well in the new environment.
“If you have no debt on your rental properties there will be no interest payable … My goal has always been to ultimately have no debt on the properties and by introducing this new rule I could speed up that and sell some properties to reduce or eliminate residential debt.
“The downside of doing it earlier than planned is that I lose the leverage – the debt is slowly being paid off. This can easily be offset by selling some residential properties and buying more industrial / commercial properties. At this point, this one seems to be the most likely choice. However, I will wait, weigh all the options, talk to my accountant more and choose the one that best suits the strategy ahead.
Another investor, Steve Goodey, who said he had “a lot” of rentals, said his strategy could change as well.
“A little, but I’m not the average investor because some of my business is commercial, I’ll buy new builds, raise rents and get rid of it. Most investors who only own one property will experience the cash flow effects. He’s probably set back their goals for about four years.
“The first against the wall will be the last to buy houses. Imagine saving for five years, then losing your home when values drop 5% and interest rates rise 2% … it’s a massive attack on the middle class, the high end of the property is not affected. Business investors and debt-free homeowners laugh. “
Nick Gentle, who helps other investors find properties through his company iFindProperty, and owns a building, said he had instead considered moving into a small development or commercial property.
“I thought about it long before the last new tax, however, buying something for it doesn’t make sense.”
Modeling by ASB showed that investors would need prices to be 30 percent lower, or rents 30 percent higher – or a mix of both – for a transaction to pay off equally under the new rules. than she was doing now.
Rosie Collins, an economist at Sense Partners, said investors with high debt are the most likely to change their strategies in response to the changes.
“It changes the underlying profitability of operating these properties. For an investor with $ 800,000 in debt at a 3% interest rate. He would pay about $ 1,250 a year in normal tax under the current rules, if he charged $ 650 a week for rent and had $ 6,000 a year in running costs.
“With the new changes, by 2026 they are now looking at a tax bill of $ 8,000 because their taxable income is effectively much higher. So they pay five or six times more tax than otherwise. This is because interest makes up a large portion of real estate investment costs compared to other types of businesses, the other costs of which mean that interest is only a small portion of it.
“This means that some heavily indebted investors will have to reconsider their business model as the rules change if they cannot cope with the higher tax burden. It will be felt the most by investors with a lot of debt – especially if you amplify that in a real estate portfolio. But it’s less of a problem if you’re not so heavily in debt. Most of the returns to investors come from capital gains anyway. “