There are good arguments for home ownership, particularly for families with children. Photo / 123rf
OPINION
Q: I need guidance. I’m a solo parent who managed to get on to the property ladder by purchasing a two-bedroom townhouse. I’m thinking about selling and just renting. Reasons:
– I need a yard.
– I need space as the house is attached, so if you get a noisy neighbour then you have to put up with it. So far my neighbours are pretty good.
– The house is really small so might not meet the needs of a teenager in future. As my child grows, I’m sure they would want to be able to go to the other side of the house in peace.
– I just want a bath – haha.
I’m thinking that if I sold I could make around $20,000 after commission and lawyers. I did buy the house with a 20% deposit, so I’ll come away with close to $200,000.
I may not be able to afford to buy another house so I could be renting till I die. Am I stupid? I don’t want to rent it out because the rent won’t cover everything.
A: New Zealanders can be obsessive about owning a home. You can do fine financially without ever having a home, provided you save seriously – perhaps investing the difference between your rent and what it would cost to own a home – to cover accommodation costs in your retirement. In some parts of Europe, most people rent for life.
However, there are good arguments for home ownership, particularly for families with children. While new build-to-rent properties are giving us more long-term leases, most leases are still short-term. And it can be disruptive for kids to be moved frequently – to new neighbourhoods and schools – because their landlord wants to sell their home or put friends or family into it.
Also, in your own home, you’re free to decorate and make alterations. You have more control over your environment.
Your gripes about your current place are fair enough. But how about saving hard so you can move somewhere larger, with land around it? Or you might find a place for about the same price as your current home but further from the CBD. Sure, that would mean a move for your child, but just the one move. You could then do what you want with the yard, without a landlord selling just when you’ve developed a garden.
There’s another issue here, too. Generally, it’s best not to try to time the property market – buying when prices are low and selling when they are high. Markets are too variable and unpredictable. But still, this doesn’t feel like a great time to sell when you’re not also buying in the same market.
From January 2022 to May 2023, average NZ house prices fell 16.4%, according to QV. They’ve since fluctuated, but they are still down 15.2% from their 2022 high.
PS. I can relate to your desire for a bath!
Q: My partner and I have a $20,000 emergency fund. It is in a balanced investment fund under my name. My partner pointed out that she has a lower PIR (prescribed investor rate) rate, so should we transfer it to her to pay less tax?
A: Good on you for setting up the fund. Your partner is right – it might as well be taxed at her rate.
One thing worries me, though. Money in a balanced fund, which probably holds lots of shares and bonds, can lose value considerably at times. What if you need to withdraw during a downturn?
I suggest you move at least half the money to a cash fund. Or, if you put emergency spending on a credit card, a one-month bank term deposit can work well, as the money can be accessed by the time you make the card payments.
Q: Just a quick question regarding CGT (capital gains tax). Do proposed taxes give leeway (if yes, how long for?) to people who purchase a new family home prior to selling their current one?
If not, would someone in that position be at risk of being taxed, even though their intent was “pure”, ie. to purchase a primary home to live in?
A: I presume your concern is that you would own two homes for a while, and so one could be deemed an investment property. But I’m sure there would be an allowance for this common situation.
The Tax Working Group’s 2019 report – if we use that as a model for what we might do – says: “Where a person, or a person and their family living with them, purchases a new home but has not yet sold their original home, both properties should be excluded homes for up to 12 months while the original home is held for sale.”
Q: There has been much discussion in your Q&A recently about a capital gains tax, particularly around fairness regarding long-owned family properties on the one hand, and people flipping the “family home” on the other.
I suggest a possible solution. What if any capital gain on any asset sale was treated as income, and taxed at that person’s income tax rate?
“Oh horror!” I hear everyone chorus. But the key would be that the taxable income is amortised at, say, 10% a year over 10 years. So, if you own the asset for more than one year, only 90% of the gain would be taxed; after two years it would be 80%, and so on. After 10 years, you would pay no tax at all.
This would remove the need for a “bright line” test, or any special CGT rates, and exemptions for the “family home”. It would also remove concerns about the sale of property that has been in the family for decades, while quite rightly nailing people who flip the “family home” every year and live off the profits.
To be fair, any provable expenses incurred in doing up a property should be offset against the capital gain before the tax calculation is applied. Could this work?
A: Your idea has merit. Trouble is, people often have to move homes after just a short period because they are promoted, lose a job, need to be near family to support someone or be supported by someone, are struck by flood, landslide or earthquake, go through a relationship break-up – or have quintuplets.
Many of these scenarios are not good news. Would it be fair to tax these people harder when they are down?
Q: I note that two-thirds of New Zealanders support a capital gains tax in some form. That is simply because two-thirds of New Zealanders don’t think they will be caught by CGT.
Any fair tax has to be universal. But the CGT proposed would exempt homeowners. That would produce inequalities.
Take two neighbours, both homeowners. One sells their house to buy a business. Ten years later, when both need to move into a rest home, the business owner sells his business and the homeowner sells his house. The business owner pays CGT, the homeowner pays nothing. The person who sat on their hands does the best.
The real problem with CGT is that one can avoid it by making idiotic decisions. For example, a person gets a promotion with a two-year assignment in another city, and rents their house while away. Does that house now become a rental and so subject to CGT when sold? If so, the house would be left unoccupied for two years (in this era of housing shortages).
In another example, a colleague had a beach unit on the Gold Coast. His neighbour wanted to swap units so family could be closer, and my friend was happy to move to a better unit. Then they realised the swap would be subject to Australian CGT and would cost hundreds of thousands of dollars. Consequently, no house swap happened.
So while CGT appears to be a fair tax, very often the less you do and the sillier your decisions, the better off you are.
A: The big problem with taxing the family home is that it would make it difficult to move. By the time your gain was taxed, you may not be able to afford a new home of similar value, let alone a bigger home because your family has grown, or a home in a more expensive area because you’ve changed jobs.
Still, you make some good points. In your example of someone renting out their home for two years, that could be allowed for. Let’s say they owned the house for seven years before selling. They could be taxed on two-sevenths of their gain. It would still be worth renting out the property. In your other scenarios, it’s not so easy.
But, as I keep saying, New Zealand can look at how other countries cope with these issues, and learn from the best.
Q: I was gobsmacked last week that you could compare your straight-talking dairy farmer’s savings with a teacher’s, to justify capital gains tax on the sale of a farm.
Maybe if the teacher had borrowed to buy the school and worked 24/7 to run a profitable business, while the farmer did a risk-free 8am to 3pm job with months of holiday and frequent farmer-only days, then we could talk about fairness.
CGT is one of those taxes that people want if someone else is paying. However, it can only be fair if it applies to everyone. I might support that with four conditions:
· It applies to all assets including collectibles and family homes, payable when the asset is sold or inherited.
· It is inflation-adjusted.
· Improvements, maintenance, depreciation and loss can be claimed.
· Other taxes are reduced to compensate. This was promised in the past (eg with GST) but did not eventuate.
Lotto and gambling winnings should also be included but I feel safe to bet a tenner that this will never be done in my lifetime.
A: Them’s fightin’ words about teachers, who have huge responsibilities for the education and wellbeing of lots of kids. But I’ll leave it to a teacher to perhaps answer you next week (in less than 200 words please).
On your first condition, see above on family homes. Collectibles? Hard to enforce, but yes in principle. Yes to inflation adjustment. Yes to improvements and losses.
But you’re not correct about GST. It was introduced in 1986 by the fourth Labour Government. Two years later they slashed the top income tax rate from 66% to 48% and, a year later, to 33%. Meanwhile, corporate tax dropped from 48 to 28%.
If we were to introduce a CGT, I would be really surprised if the Government didn’t cut income tax rates to encourage acceptance of the new tax.
On Lotto, read on.
Okay, I’m starting to feel a bit CGTed out, and I bet many readers are too. We’ll continue the discussion in the next couple of columns with some good letters I’ve already received, but no more, please.
Q: Should Lotto winnings be taxed, as you suggested last week? The answer is a resounding no. All charges, fees and taxes are already paid by authorities, before the final winning payment, which is then tax-free.
Once winnings are paid it is not long before some moneys come back into the system, as the earnings on the money become liable to taxes. Hence taxes are perpetual.
It’s unlike America, where all taxes are paid out of winnings: eg: If you win $100,000, state taxes, federal taxes etc taken out amount to 50 to 60% of the total. The actual amount in hand is $40,000 to $50,000 only.
A: That’s a fair point about tax already paid. But I’ve got a couple of quibbles with your US info. Firstly, state tax rates on winnings vary widely. Also, as Investopedia says: “There’s a bit of good news here. If you itemise your deductions, you can deduct gambling losses up to the amount that’s offset by your winnings. You must be able to prove the numbers with records of your winnings and losses.”
Another reader made a similar point to yours about the Lotteries Commission already paying tax. And, he added: “Seems to me the 25% for the Lottery Grants Board is a form of tax which is used for grants that would otherwise be funded from general taxation. For example, most of Creative NZ’s funding is from this source.”
I’m not going to die in a ditch over this. It does seem to me, though, that if you win $100,000, and a chunk of tax is immediately deducted, you’ll still be happy. You’ve got a lot more than you had yesterday.
* Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.