Auckland landlord Peter Lewis, who owns 12 rental properties, has calculated he will be liable for $16,000 more tax annually under Government changes announced yesterday.
So he has a plan.
"My personal tax bill will increase by $16,000 per year if I do nothing - not exciting when I already pay a five-figure income tax bill," said the Auckland Property Investors Association vice-president who will lose tax deductibility on his mortgage expenses.
"But by making some changes I can reduce that figure to almost zero dollars.
"It is highly likely that I will make that change by terminating a long-term, excellent tenant, selling that property which I've owned for more than 30 years and using the proceeds to pay off all my mortgages on other properties," he said.
"I will then have no interest bill to non-deduct."
He feels sorry for his tenant "but the cost of keeping that property will become too great. And no, it won't reduce that housing shortage because although an owner-occupier family will move into that house, my ex-tenant will be homeless," Lewis said.
Accountant Anthony Appleton-Tattersall said the Government would receive a "significant" amount of extra tax by banning mortgage interest deductibility. The state could get as much as $600 million annually, he estimated.
Reserve Bank data shows just over $300 billion in housing mortgage debt by January this year, he noted.
Lending to investors was 24.7 per cent of all new lending in last year's fourth quarter "so assuming that the 24.7 per cent represents the whole market and that all the investor debt is at current low rates of 2.5 per cent which is very conservative, you're looking at $1.85b in interest paid by investors annually.
"Then working on the assumption of 33 per cent tax rate, that's over $600m of additional tax bills per year if all the interest were removed," Appleton-Tattersall said.
The changes would be phased in during the next four years, he noted, so the full $600m would not begin to come in annually till around 2025.
Questions put to Inland Revenue about how much extra money would come in from axing mortgage interest deductibility could not be answered.
A spokesperson said there had not yet been a regulatory impact assessment completed on the deductibility. That would be published in conjunction with the legislation later this year, he said.
The Herald has reported on economist Cameron Bagrie questioning why Treasury was unable to provide suitable advice on the "significant" decision to scrap the interest deductibility loophole.
A regulatory impact statement from the Treasury revealed it was unable to provide a recommendation on this policy given the "extremely tight time constraints. Given time constraints and lack of analysis, the Treasury does not recommend progressing the interest deductibility proposal without further analysis."
Bagrie said he was "scratching [his] head" about why the Treasury was unable to make a recommendation on the new policy, given it had four months to do it.
"This is a really significant policy change. It should have been up there in terms of their priorities," he said.
David Whitburn, an active Auckland investor and developer, also expressed disappointment that Treasury had not made an assessment. But he estimated "there will probably be a few hundred million dollars saved every year from denying investors interest".
Terry Baucher, a director of tax advisory firm Baucher Consulting, has also calculated around $650m could be generated in extra tax revenue annually, mainly due to extending the bright-line test from five to 10 years.
NZ Property Investors Federation president Andrew King yesterday called the non-deductibility change "bizarre and crazy", saying he was completely blindsided by it. He had expected the anti-flipper or bright-line test to be extended from five to 10 years but had no inkling of the mortgage deductibility axe falling.
"What, so every other business in New Zealand can still claim tax deductions, but not landlords?" King asked. "You're joking! This is just bizarre, it's crazy."
The sums involved could be tens of millions of dollars, King said, and that would now be lost to landlords, already struggling under Residential Tenancies Act changes from last month which swung the power in tenants' favour.