Labour’s Andrew Little has revealed the party intends to remove negative gearing from property investors, in an election promise intended to please first home buyers, by reducing investor interest in the property market, thus slowing the growth in property prices.
The policy, however, is likely to have the opposite effect on prices, reduce the amount of new construction, and unfairly targets working class investors, while large corporations would not feel the effects of the proposed new tax system.
Negative gearing happens when a rental property operates at an annual loss. The owner of the property can attribute those losses to their normal wages or salary; reducing their income and resulting tax level. Investors choose to operate loss attributing businesses, with hopes of making a capital gain over a longer period of time.
In real terms, this means the weekly cost of owning a rental property might be $200 per week, but after an effective tax offset is applied, those costs can be reduced for the investor by up to 33%.
If negative gearing is removed, it will only affect salary or wage earners. Professional investors and business owners will find other suitable tax structures to ensure their losses are considered true tax deductible expenses in the eyes of the IRD. Normal working class citizens have less available in their accounting tool chest.
Worse still, the property supply will take a hit. That means higher prices and a worsening housing shortage.
Brand new houses typically cost more than existing ones, but in the current system, with negative gearing, depreciation of chattels increases the available tax savings. The net result of negative gearing in this circumstance could reduce the weekly cost of owning a brand new property from $200 per week to as low as $60 – an attractive option which funds the construction of much needed new housing stock.
Instead, Labour will force investors to look for higher yields, like old houses and apartments. Anything in the ‘affordable’ bracket will become the new hunting ground for investors, while brand new houses for rent will be a thing of the past. We may even see landlords recoup their lost tax incentives by charging higher rents.
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