My sister has a prime waterfront spot and converted their downstairs into rental accommodation for Airbnb, and it has taken off.

They are earning more for their small two-room complex than my husband earns a week.

People are in and out on a daily basis. She says there are very few overheads, especially as she charges a cleaning fee.

The only problem she faces is her neighbours, who feel their privacy has been lost, and they complain about strangers around the place all the time. They share a beach frontage.
A great way to increase your retirement income. Who needs to save?

I would be interested to hear your comments on this type of investment.

Something tells me the days of making really big money that way might be numbered.

There's more and more talk of bed taxes or increased rates for people who rent out space this way — either on Airbnb or bookabach.co.nz or holidayhouses.co.nz or whatever else there is out there.

And while costs might rise, income might fall. As more people hear stories like your sister's, they will do the same thing, and that must push down prices.

There are also risks. It sounds as if your sister has had only well-behaved guests. But every now and then there must be charmers who steal stuff or damage properties.

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Nor should the neighbour issue be ignored. They have my sympathy. It's different having one family of neighbours sharing your frontage from having all and sundry. And life tells us that it's not wise to fall out with your neighbours.

Okay, enough wet-blanket talk. Even if there are occasional badly behaved guests and upset neighbours, and even if prices tend to fall, this still might be a pretty good supplement to NZ Super in retirement.

For those who live in a beautiful spot or a place handy to tourist attractions or concert venues or whatever, it's worth a try — if you don't mind your own privacy being compromised.

With so many people retiring in houses that are worth huge amounts but don't generate any income — other than providing accommodation for the owners — it's good to see people finding ways to get some money out of their homes.

Landlord liabilities

There is a widespread belief that residential landlords make large profits with minimal effort and negligible risk. This is quite untrue.

My gross income from investments is probably about the same as I would get if I was once again employed in the corporate world. I typically work more than a 40-hour week but I get no paid holidays or other benefits.

There is no such thing as a free anything when you are a landlord.

The major contrast, though, is the risk. As you so often preach, there is always a trade-off between risk and reward.

A landlord risks a lot. Much of my own capital is risked when tenanting a property. For this, I reasonably expect to get a reward of both income and growth.

This is not dissimilar to most other forms of investment, yet some commentators seem to think my rental business should not be treated the same way as any other business.

They stridently advocate special and unique tax treatment of any capital gains and the ring-fencing of any specific losses. Such tax laws do not and will not apply to any other business, only those like mine.

For instance, I have a forest block. It takes about 28 years for the trees to mature to harvest. Unlike other investments, all outgoings, including what would otherwise be capital costs (excluding the land) are expensed each year.

No ring-fencing here, nor should there be, otherwise no one would invest in such an enterprise.

A similar scenario can play out in residential renting. It may take years before the rent, which normally rises at close to the inflation rate, outpaces the holding costs such as rates, insurance, water and maintenance, which typically increase at above the inflation rate.

Once the property is profitable, this is akin to any other long-term business, where annual income is taxed, any annual losses may be offset against other income, but asset growth (capital gains) is not. Fair reward I would say for the risk.

This is something not faced by employees, who deal with minimal, if any, risk of capital loss and who generally have a certainty of a positive annual income.

Fair point about taking risk and therefore hoping to be rewarded.

What about comparing forestry to being a landlord? This is getting a bit beyond my knowledge of tax, so I asked KPMG tax partner Bruce Bernacchi.

"There is a whole special tax regime for forestry investments," he says.

"That said, when trees are harvested, the income is taxable. Contrast this to the sale of a house where any gains are generally not taxable (subject to the recently introduced bright-line two and now five-year holding period tests). I don't think forestry and housing make for a good comparison."

Under the bright-line test, if you sell an investment property within five years of buying it — it used to be two years — any gain you make is taxable.

Bernacchi goes on to say, "I think the difference between housing and many businesses is that many people appear to have invested in housing and have been happy to live with losses for a number of years, because they can offset the losses against their salary and wage income — and other sources of income — and then bank a tax-free capital gain on sale of the house. Contrast this to investing in a 'productive' business where the goal is generally to make money from day one. Most productive businesses attempt to make money from trading operations, rather than planning on a tax-free exit. Also, productive businesses can carry the risk of complete failure, whereas, generally, housing is extremely unlikely to result in the total investment being lost."

But Bernacchi is not anti-landlords.

"Residential real-estate investment serves an important role in society. I do think property has, however, enjoyed a run of tax-loss generation that has only made sense economically because of the significant tax-free capital gains that are made on exit of the property.

"The tax system has always taxed gains on property bought with the intention of being sold or as part of a business, but in practice this law is hard to enforce and hence we now have the bright-line tests to address this."

A couple of quibbles from me:

You said rent "normally rises at close to the inflation rate". But a graph published by the Tax Working Group, which you can see at tinyurl.com/NZRentGraph, shows that, since 1994, rents have grown considerably faster than wages, which in turn have grown considerably faster than CPI inflation.

As someone who has been employed for the first half of my career and self-employed for the second half, I don't think employees are necessarily more financially secure. I lost my job twice when newspapers folded. Since I've been self-employed, I've had several sources of income. If one dries up, I'm not suddenly getting no income.

'Unfair' tax advantage

Negative gearing is unfair. It's an unfair tax advantage to the wealthy, and a penalty to the less financially fortunate.

It's no different from the Queen Street farmer antics of the early 80s. City dwellers bought kiwifruit farms so they could operate them at a loss to offset against incomes from other sources.

Such practices increased rampantly as people took advantage of the free tax-dodging on offer — until the IRD eventually took the candy jar away.

We lived in the US for many years. You can carry losses forward in some situations, but you can only offset losses against gains within the same enterprise. Farming or rental losses can only be offset against gains within those operations, and not against professional or other sources of income.

For the benefit of other readers, negative gearing is what Bernacchi describes above — when a landlord makes losses on a property and then deducts those losses against other income, perhaps from wages.

Finance Minister Grant Robertson recently said the Government will prohibit negative gearing from next year. Landlords will presumably be able to carry their losses forward and subtract them from future profits on their properties or gains when they sell. This is sometimes called ring-fencing the losses.

Property investor organisations are, not surprisingly, unhappy.

Does Bernacchi agree with our correspondent that negative gearing is unfair? "I think the introduction and extension of the bright-line tests is reasonable, as the existing laws that have always taxed gains on property bought with the intention of resale have been hard to enforce," he says.

However, "With the bright-line tests now introduced, I think negative gearing is fair, as people can no longer so easily justify incurring losses in anticipation of enjoying future tax-free capital gains."

Nor does he agree with you that negative gearing is like Queen Street farming. "I think rental property investment is of real value to society. If we don't have residential real-estate investors, then we don't have places to rent, and residential property investment serves as a sensible form of saving and investment for many people."

On your comment about the US tax system, Bernacchi says, "I'm not a US tax expert, but I do know that other jurisdictions do only allow losses to be offset against future income earned of the same type.

"I am not in favour of this as it would overly complicate the NZ tax system. We have a relatively straightforward tax system for individuals compared with many other countries and I don't believe complicating it like this is warranted."

He adds, "I think a broader review of the taxation of property as part of the Tax Working Group is overdue, to really consider whether we are still taxing property in a more advantaged manner to other forms of savings and investment."

What workload?

I was exhausted, too, when I read about the huge workload of the landlord in "Exhausting work" last week. So I will share with you my workload.

1. On or about the 4th of each month check rental bank account by computer to see if the property managers have paid all rents.

2. Transfer half of the gross income for the previous month into an interest-bearing account. But make sure there is still $2000 available for sudden small bills.

The interest-bearing account pays big bills such as tax and rates and has a reserve of at least $15,000 for unscheduled or scheduled maintenance. Half the net income for the previous month is then available for food (and wine) bills during the month.

3. Multiply by 12 the gross income for the previous month to see if it's on target for the year.

4. Close computer bank account.

Job done — in less than 10 minutes a month.

At the same time I give thanks to the property managers who look after my properties for 7 per cent commission. Worth every cent.

Thanks for another perspective.

Next week we'll look into several letters about tax deductions of mortgage interest on rental properties and homes. These landlord issues just keep rolling on.

- Mary Holm is a freelance journalist, a director of the Financial Markets Authority and Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. Her website is www.maryholm.com. Her opinions are personal, and 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 Money Column, Private Bag 92198 Victoria St West, Auckland 1142. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.