Warning
This article is for information purposes only and should not be construed as financial, or other, advice.
Information
Opinion
In New Zealand there is a long history of investment in various types of real estate. Many BFD readers undertake this activity for investment purposes and have probably done rather well out of it. One of the traditional reasons for entering the property game was for the tax benefits; however, that is no longer the case. Bill English’s ignorant removal of depreciation allowances for investment properties a decade or so back, the silly “brightline test” and the Ardern Government’s removal of interest deductibility means there are no tax advantages for investing in real estate.
The situation in recent times is that you, the mug investor wearing blinkers, do all the work and are taxed mercilessly by the Inland Revenue with nothing much to show for it. Heaven knows why anybody endures poor people, solo mothers and moronic students wrecking their properties and then pay 39 cents in the dollar on the miserable net rent collected. Truly a bizarre undertaking these days.
I suggest you remove the blinkers, stop thinking in terms of the tax laws circa 1980, ignore lectures by your father from the same period (which no longer apply) and look for other forms of investment that will be of greater benefit for you.
It would be my advice to sell up, pay off the mortgages and invest your profits in a managed fund. Something which isn’t widely understood is that in New Zealand managed funds that invest primarily in shares do not pay tax on capital gains – just as was the case with property. For instance, say the fund manager buys shares in company X at $10 each and sells them a few months later for $11.23: the capital gain isn’t taxed.
If you look at returns on a fund manager’s website you may see a figure of, say, 9.6% as the “return before taxation”, but the net figure after tax will be, say, 9.3%. The very small amount of tax represents either taxation of dividends they receive or a nominal tax on what is known as a ‘foreign investment fund’ (i.e. on overseas shares). In the grand scheme of things, it’s negligible.
If you sold up your two (or however many) investment properties, ended up with a million dollars after discharging mortgages and invested that in a managed fund with your bank, you could happily enjoy mostly tax free returns. The reason I mention your bank is the people they employ as fund managers tend to be fairly conservative and unlikely to stuff things up too much. No ghastly tenants to deal with, no calling a plumber at 4 o’clock in the morning, no rates increases, no insurance premiums, no missed rent payments, no midnight flits: just profits.
Although the markets have had a shocking few months now – when everything is down 15 to 20% – it’s probably a good time to invest; please remember that the 15% drop won’t include your money! When you average returns out over a 5- or 10-year period, you can expect to be well ahead. Like so many things in life, what worked well in the past for property investment has had its day; you need to sit down, do the arithmetic, see the returns you receive from rents are basically a joke and look for something that will earn you a decent return without you having to do very much. It’s no longer 1980.
