Ring-fencing housing losses

The Government is looking at ring fencing losses on investment properties, This is part of an interesting debate where the Reserve Bank is blaming tax laws on properties, while the IRD is saying property is treated no differently from any other commercial activity.

In a sense they are both right, the key being that a bank will lend you 95% of the capital needed to buy a house, but will not generally lend you 95% of the capital needed to buy shares or start a business. So the tax laws do not discriminate, but due to bank lending policies, greater benefits are derived from investment properties as you can leverage them.

The Government needs to be careful about the law of unintended consequences. AT present a property owner may be content to have the income from renting it out to be less than the interest on the mortgage, as the difference can be subtracted from taxable income.

But if you ringfence the property tax loss, then landlords may seek to increase rental prices significantly.

The last word goes to tax expert John Shewan:

“I think it would be a serious mistake to jump opportunistically at what would be an ad hoc measure that is unjustified.

“Sir Robert Muldoon tried this back in the early 1980s. It was a devastating failure … It would be contrary to good tax policy to delete one particular kind of investment and ring-fence losses.”