It's not unfair that investors get to deduct tax - but it's a struggle understanding the logic of not letting homeowners do the same. Photo / 123RF
Can you explain why investors in property get tax relief on interest on their mortgages when home owners do not? Surely this is at the heart of an unjust system?
Various efforts have been made to rein in speculators in the property market — the bright line increased, for example. But a better definition of "investors" versus "speculators" would help.
The most unfair aspect of those who buy property with little down payment is that they can get a tax benefit from the interest on the mortgage — not to mention offsetting any losses against other income (negative gearing).
If both of these practices were stopped, there would probably be a flood of properties on the market. Could you comment on this seemingly unjust anomaly?
Sorry, but I disagree that it's unfair for property investors to deduct mortgage interest.
Paying that interest is an expense of doing business — just like insurance, rates and maintenance. On the other side of the ledger, property investors have to pay tax on the rent they receive.
In any business you pay tax on your income minus your expenses. It would be grossly unfair if the mortgage interest deduction was removed.
The more interesting question, I think, is why homeowners can't deduct the interest they pay on their mortgages. It is deductible in some countries.
According to Wikipedia, "The Netherlands, Switzerland, and the United States each allow the deduction. In Belgium, Denmark, Ireland and Sweden, only a minor part of mortgage interest is deductible."
Other countries where homeowners' mortgage interest used to be deductible include France, Germany and the UK, all of which abolished the deduction late last century, says a paper written for the US National Association of Home Builders.
I struggle with the logic of not letting homeowners deduct their mortgage interest. We're taxed on interest we earn, so why not deduct interest we pay?
But that's the way the system works in New Zealand, and I can't see it changing in a hurry, as it would further widen the gap between those lucky enough to own their own homes and those who don't.
By the way, not many property investors are buying with small down payments these days.
The Reserve Bank has said that, in most cases, investment property loans for more than 65 per cent of the property's value "can make up no more than 5 per cent of a bank's total new lending in this category". So most investors' deposits are at least 35 per cent.
We'll go into negative gearing next week.
The landlord's 40-hour week: On waking, check bank balances to see if sufficient to pay bills (mortgage, rates, insurance, water, body corporate, trade accounts, tradesmen, etc).
Check if tenants have paid rent. If not, text, email or call.
Read press to keep up to date with matters pertaining to the housing industry, legislation changes, mortgage rates, etc.
Load car with small hand tools, lawnmower, waterblaster, etc. Visit properties to mow lawns, trim hedges, do gardens, pick up rubbish (try to time this before weekly rubbish collection).
Say hello to tenants and take up offer of tea and biscuits (yeah, right!).
Inspect what is wrong, visit DIY stores and/or head home to pick up additional tools or stock to fix problem.
Home after property round: unload car and excess rubbish for disposal. Clean equipment and stack tools away nicely (in my case, yeah, right!).
Read mail (usually bills, schedule for payment). Read email (ditto, plus any tenant issues, urgent ones may have been received by text or cellphone call). Apportion costs for water charges and advise tenants.
Arrange meetings with tradesmen (for more complex jobs) and agents in the case of needing to find a new tenant or take remedial action.
Arrange meeting with bank A re overdraft. Arrange meeting with bank B re refinancing mortgage. Diarise note to contact valuer and solicitor. Attend educational meeting (for example, local property association or trade group). Read trade and property magazines, newspaper, etc.
Continue with billing cycle. Email tenants re property inspections or maintenance visits.
Prepare paperwork for Tenancy Tribunal hearing (rent summaries, damage reports, noise control complaints from neighbours, 14-day and 90-day letters, etc).
Plan for future acquisitions (visit real-estate websites and the like). Read council papers re District Plan changes. Wonder why you have not heard back from them re resource consents and building permits, but have received the same request for information for the third time re your septic tank, despite your response in full the first time.
I'm exhausted just reading this. But:
• I said last week, "If you're working 40 hours a week on your properties, there's something wrong — unless you own many properties, in which case you're probably richly rewarded." For you to be putting this much work in, you must own quite a few properties.
• Surely you don't trim hedges, apportion water charges, find new tenants, meet with a bank and so on every week? A little exaggeration perhaps? And if you're working on Tenancy Tribunal hearings weekly, you've got to wonder.
• See the paragraph in the next letter, starting "The writer also seems ... "
Your response to the "Nothing Passive" property investor last week was well balanced.
However, why you don't correct this (and other correspondents) when they make statements like, "I always viewed myself as part of the solution, providing — at as low a cost as possible — adequate residential amenity", always puzzles me.
Unless the writer is actively adding new properties to the housing pool, their activities are certainly contributing to the housing shortage by increasing demand and raising prices.
Buying a new house off the plans might be useful if their investment helps get these additional properties built, but even this is insignificant where there is already sufficient demand to allow these properties to go ahead.
If the writer feels so strongly about contributing to society and reducing the housing shortage, perhaps buying shares in a construction company would be a better way to achieve this?
The writer also seems to confuse property investment (which is a mainly passive investment) with rental property management and maintenance.
If the writer feels they are under-compensated for their property management efforts, they would be better off paying a professional property manager and concentrating on more lucrative endeavours.
Similarly, if the writer has failed to make excellent investment gains in what has been perhaps the biggest bull market in recent history, they should take their investment dollars elsewhere.
Buying construction company shares probably wouldn't help, unless the company was issuing new shares. Otherwise, you're just buying from another investor. Thanks for making some thought-provoking points.
The money for the winter energy payment to superannuitants comes from taxpayers, I presume.
The Government uses taxpayers' money to distribute to the people most in need, I hope.
It seems to me to be morally wrong for you to suggest we take it if we do not need it, even to give to charity.
Clearly it would be morally wrong if someone said they needed the payment when they didn't. But the Government has chosen to give it to everyone who gets NZ Super, giving them the opportunity to say "no thanks" if they wish.
I don't have a problem with a wealthy person taking the money and redistributing it, perhaps to people who they view as getting too little support from the state. But if you see it differently, I respect that.
In your response last week about compulsory employer contributions to KiwiSaver, you said that since KiwiSaver started, "employers have probably tended to give smaller pay rises than they otherwise would have to compensate for the costs of KiwiSaver."
We don't actually know that, but it is probably right. But let's just think about the implications of that comment.
Those employees who can afford to join KiwiSaver have collected the employer's subsidy in full. All employees, including the members, have received smaller pay rises.
The winners? Undoubtedly that's the members because, on average, the smaller pay rise will be less than the employer's KiwiSaver contribution.
The losers? Those who can't afford to save but who effectively help pay for the KiwiSaver members' employer contributions. That kind of redistribution is always the way with tax breaks for saving (they are regressive). It also effectively applies to employer subsidies for retirement saving.
For that reason I think employers shouldn't subsidise retirement savings and should instead focus on paying all employees the right amount to get a job done. Whether one employee belongs to KiwiSaver or not shouldn't affect their total remuneration. They shouldn't get paid more to save, they should be paid to get the job done.
I take your point about non-KiwiSaver employees effectively subsidising those in KiwiSaver. But although some aren't in the scheme because they really can't afford it, I suspect many have other reasons. For instance, I've heard some say they're wealthy enough and don't need it.
It's also worth noting that the KiwiSaver tax credit — strictly not a tax break but a similar incentive from the Government — in a way gives more to those on low incomes than on high incomes. How come?
Say you earn $40,000, you and your employer contribute 3 per cent each, and you get the maximum tax credit of $521. Your $1200 contribution is multiplied 2.3 times by employer and government contributions. But if you earn $100,000, your $3000 contribution is multiplied only 1.8 times by employer and government contributions. The difference is because the tax credit has a maximum.
Just a quick comment on your reply to the letter headed "Complexities of tax on share gains". You replied, "If you still want to trade, the law about tax on your gains is the same as the law about tax on gains on investment property or art or anything else, actually."
That assumes the only shares the taxpayer owns are NZ shares or Australian shares listed on an Australian exchange and which maintain a franking account.
Your response omits to comment on the foreign investment fund (FIF) rules that apply to non-NZ/Australian shares (unless the $50,000 de minimis exemption for individuals or trust applies).
Another reader also wrote about this. And I can't argue with you both. I probably should have mentioned FIF. The trouble is I was trying to keep things simple. It's often a trade-off.
It seems to me that the people with direct shareholdings mostly hold New Zealand or Aussie shares, or foreign shares worth less than $50,000. So the FIF rules would apply to few readers.
True, many other New Zealanders have a stake in foreign shares through their KiwiSaver funds or other managed funds. But the funds take care of the taxation.
- 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.
OPINION: You need to consider interest, taxes and fees.