Do You Need a Contingency Plan For Property Investment?
The government is extending the bright line test for property so that residential properties will be taxed on any gains, if they’re sold within five years of purchase (instead of the current two years). The extension will apply to residential investment properties purchased from the date on which the bill receives the Royal Assent, which is expected in March.
Will the extension of the bright line test affect properties already purchased under the two-year regime? According to Housing and Urban Development Minister, Phil Twyford, the answer is “no”. The change will not be retrospective. Properties purchased already are unlikely to be taxed on gains, if they are not sold for at least two years.
Mr Twyford, has also confirmed that although investors would be taxed on gains if they sold within five years, any losses that arise if the property is sold at a lower price than what it was purchased for, would not be tax deductible. Therefore, if the market goes in to a downturn and investors take a hit, they must wear the full extent of the losses.
The introduction of the new regulations ring fencing tax losses will apply to all residential property investments, regardless of when they were purchased.
What does this mean?
Investors who are currently offsetting losses from rental properties against other income (such as wages), need to start working on a contingency plan. Those carrying more debt from leveraging their capital growth (negative gearing) will have their cash flow affected. Investors will often be sitting on annual losses of $15,000-$20,000 and many currently rely on tax credits from using these losses to survive.
When will these rules bite?
Now interest rates are historically low. The impact of these changes will really bite when interest rates rise.
For example, if in a few years’ time, interest rates were to go up 3% and you owe $2 million, that’s an extra $60,000 you need to find to fund your rental investments. Ring-fenced losses mean you don’t get $20,000 (33%) tax relief to soften the blow. A sudden hike in interest rates for those with heavy negatively geared lending and without fixed rate contracts is more likely to lead to insolvency issues.
What happens when I’m selling a property?
Generally, if you’re selling a residential property, it’s your intention when buying a property that matters. If one of your intentions when you bought the property was to sell it, then you’ll have tax to pay on any profit you make from its’ resale. The tax you pay depends on four things:
o Your intent when you purchased
o Your history of buying and selling
o Whether you are in or associated with the property industry
o Whether you buy and sell a property within two/ five years
According to IRD, the bright line test overrides the old ‘intention test’. The upshot of that is no matter what your intention was when buying, if you sell a residential property within two years (five years when the extension is brought in) the bright line test kicks in to tax the gain on sale.
Some exemptions from the bright line test exist e.g. sale of own home, relationship property split and inheritances upon death etc.
The bright line test does not apply to commercial property at present.
If you’d like to discuss how these changes might affect you, or you think you need advice to grow your wealth, contact Ramanie de Zoysa, Love to Grow’s Tax and Business Services Manager. Ramanie can help take the worry out of tax compliance and ensure that your personal risk is kept to a minimum.
Love to Grow (Wgtn) Ltd
Tel: (04) 972-4182 or (09) 282 3054
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