Property management involves a lot of risk, and at Auckland Property Management our focus is on risk reduction strategies for our owners. Part of this service includes monthly property investment seminars on topics of interest to our clients.
Our first property investment seminar of 2019 was held on 5th March and was a great success with attendees representing both current clients and private property investors.
We had two very informative speakers present on new taxation laws (specifically on ring fencing) and increasing equity in investment properties.
Lisa Murphy, Tax Partner Auckland, RSM New Zealand
The first speaker was Lisa Murphy from RSM New Zealand who discussed ring-fencing of residential property losses. Lisa is a tax partner at the Auckland office of RSM and specialises in providing tax advice to both national and international clients.
Lisa began her presentation by listing changes that will have the most significant impact on property investors; namely:
- Depreciation fit out
- 0% depreciation rate for buildings
- Eliminating Loss Attributing Qualifying Companies (LAQC)
- Bright line test increase from 2 years to 5 years
- Residential ring fencing
- Capital gains tax
These changes to tax laws will take effect from 1st April 2019 (retrospectively as the final reading is not until June 2019).
This policy change of ring-fencing denies deduction where loss is generated, and allocates excess deductions to the subsequent year for residential rental properties. In other words, residential rental property losses can be no more than rental income and disposal income.
In application, deductions specific to residential rental properties are ring-fenced and capped for each year at rental income plus “net disposal income”. Net disposal income is generally income derived from the disposal of residential rental properties (e.g. bright-line sale, depreciation recovery).
If all residential rental properties in a portfolio are sold, but the investor later acquires another residential rental property, one may elect to carry forward deductions as relating to the portfolio, referred to as a “tainted” residential rental property.
It was made abundantly clear that with these changes to tax laws, one now more than ever needs to seek the advice of a registered tax advisor to ensure one’s residential rental property portfolio runs smoothly and without negative consequence at financial year end.
Roy Adams, Consultant, Asset Consultants
Roy began his presentation with a brief synopsis of current residential property market conditions and noted that the market is changing… it is a buyer’s market creating an abundance of opportunities for the wise investor.
Auckland’s number of days to sell increased to 51 days, the highest number since February 2009. The level of inventory for sale currently sits at 26 weeks, 6 weeks more than in January 2018.
Roy then moved onto the concept of increasing equity in an investment property, asking the question why an investor would consider this as opposed to merely sitting on the property for a few years before selling at a profit.
The following points highlight why increasing equity should be a strong consideration:
- Use the additional equity as a deposit for your next property
- Create revolving credit for renovations, or use as a buffer
- Don’t sell for profit, leverage instead
- Capital gain will be higher the longer you wait to sell, e.g. a property worth $500,000 once renovated, increases its value to $600,000. In 10 years’ time the property will be worth $200,000 more, this is 8% compound capital growth
- Increasing cash flow always increases equity
- Enables you to have unencumbered properties
The following examples show simple ways to increase equity and cash flow in a residential property:
- Modernising a property
- Simple internal renovations (add a bedroom – its quick, cost effective, and often doesn’t require consent.)
- Consented internal renovations (create studio room, split house into separate flats)
- Add dwellings (minor dwelling / another house)
Non single house zone: 30m2 for a studio, 45m2 for 1 or more bedrooms
Single house zone: 65m2 minor dwelling
Asset consultants hold monthly mini property tours where attendees are bused to various properties showcasing properties that have increased their equity through one or more of the above mentioned ways. The next property tour is on Sunday 31st March from 1pm. Please email [email protected] to register.
If you have any questions relating to the topics outlined above then please email Toni Heath on [email protected].
APM will be holding more events like this in 2019. If there are specific topics you would like to hear about then we would love to hear from you. Email Lana on [email protected] with your suggestions.