Labour on housing

Michael Reddell Housing, labour party

There was nothing positive to be said about the previous Labour-led government’s approach to housing and house prices.  There is nothing positive to be said about the current National-led government’s approach.  The rhetoric while they were in Opposition had been encouraging.  The substance of reform has been almost non-existent, all the while cloaked in fairly brazen, even offensive, rhetoric from both Prime Ministers (Key and English) suggesting that it was all a mark of success, a quality problem, and so on, along with suggestions that the government’s approach was working.    By that standard, I hope I don’t live to see a failed housing policy.

There have been some hopes, in some circles, that the Labour Party, if they were to lead a new government after this year’s election, might be different.  Their housing spokesman seems pretty impressive, and seems to understand the issues.  In a no doubt mutually beneficial move, he and Oliver Hartwich, head of the business-funded New Zealand Initiative, even did a joint op-ed on freeing-up the market in urban land.   Places where landowners can use their land pretty freely tend not to have the sorts of grossly dysfunctional housing markets New Zealand (and Australia, and the UK, and much of the US east and west coasts) have, even if those places are big and fast-growing.

I’ve liked the talk, but have been a bit sceptical that it will come to much.  In part, I’m sceptical because no other country (or even large area) I’m aware of that once got into the morass of planning and land use laws has successfully cut through the mess and re-established a well-functioning housing and urban land market.  In such a hypothetical country, we wouldn’t need multiple ministers for different dimensions of housing policy.  I’m also sceptical because there is a great deal local government could do to free up urban land markets, but even though our big cities all have Labour-affiliated mayors, there has been no sign of such liberalisation.    The Deputy Mayor of Wellington for example leads the Wellington City Council ‘housing taskforce”.  Paul Eagle is about to step into a safe Labour seat.   His taskforce seems keen on the council building more houses, and tossing more out subsidies, but nothing is heard of simply freeing up the market in land.  Or even of looking for innovative ways to allow local communities to both protect existing interests and respond, over time, to changing opportunities.

I first wrote about this last October, when Phil Twyford had put out a substantial piece on Labour’s housing programme.   There was a five point plan.  Reform of the planning system appeared on the list, but briefly and well down the list.    As I noted then

It has the feel of a ritual incantation –  feeling the need to acknowledge the point –  rather than being any sort of centrepiece of a housing reform programme.

Yesterday, my doubts only intensified.  Labour’s leader, Andrew Little, devoted the bulk of his election year conference speech to housing, complete with the sorts of personal touches audiences like (although he didn’t mention the tasteful lavender out the front of his current house, which I walk past each day).  Media reports say the speech went down well with the faithful.

This time there was a four point plan.  It was a lot like Twyford’s plan from late last year, with one omission.   The continuing features were:

  • the state building more “affordable” houses,
  • restrictions on “overseas speculators” buying existing houses,
  • making “speculators who flip houses with five years pay tax on their profits,
  • “ring-fencing” losses on investment properties.

But in the entire speech –  and recall that most of it was devoted to housing –  there was not a single mention of freeing up the market in urban land, reforming the planning system etc.  Not even a hint.    I understand that giving landowners choice etc probably isn’t the sort of stuff that gets the Labour faithful to their feet with applause.   But to include not a single mention of the key distortion that has given us some of the most expensive (relative to income) house prices in the advanced world, doesn’t inspire much confidence.     Planning reform isn’t going to be easy.  Few big reforms are under MMP.  It probably isn’t something the Greens are keen on.  And if the putative Prime Minister isn’t on-board, hasn’t yet internalised (or even been willing to simply state it openly) that this is where the biggest problems lie, it is hard to believe that a new government would really be willing to spend much political capital in reforming and freeing up the system, no matter how capable, hardworking and insightful a portfolio minister might be.

Probably reforms of this sort don’t play well in focus groups (although surely there is some responsibility on political leaders to help shape the debate, and change what people respond positively to?)   On the other hand, presumably the data suggest that people react well to attacks on “speculators”, “loopholes”, “subsidies”, which appeared numerous time in Little’s speech.

The headlines around the speech were around the leader’s official confirmation that Labour will prohibit people from offsetting tax losses from investment properties against other non-property income.   This is, apparently, to “close a loophole” to stop “speculators” receiving “subsidies”.     In fact, it is nothing of the sort.

For better or worse, New Zealand has a comprehensive income tax system in which different types of factor income are treated much the same, and taxed at much the same rate.  There are various exceptions, and lots of devil in the detail (thus, for example, the establishment of the PIE regime a decade or so gave an advantage to funds in widely-held entities over individually-held assets).  It has long been pretty fundamental to that system that one tots up all the gains and losses over the course of the year, and then pays tax only on the overall net income.  It would be absurd, for example, to take a business with five operating divisions and tax them on the basis only of the lines of business that made profits, even though several of the other divisions may have made large losses.    Since time is money, it wouldn’t be much consolation to say “oh, don’t worry, you can offset those losses against future profits in those particular operating divisions”.

But that is just what Labour proposes to do.    There is no “subsidy”, there is no “loophole”.   There is simply a conventional comprehensive income tax system at work.  If you lose money on one activity, you can offset it against gains on other activities.

And, if you are concerned about favourable tax treatments then, within the comprehensive income tax model, the clear and unambiguous feature of the tax system that favours one group of potential house purchasers over another is the non-taxation of imputed rents on owner-occupied houses.    Relative to other potential purchasers, this feature provides a big advantage to unleveraged owner-occupiers (ie mostly those in late middle age and the elderly).   This isn’t some idle Reddellian claim.  You can see the calculations worked out carefully in a Reserve Bank discussion paper, The tax system and housing demand in New Zealand, from a few years ago, showing how the features of the New Zealand tax system affect what different types of potential purchasers will be willing to pay.

Within a comprehensive income tax system, I’m at a loss to understand the economic logic behind Labour’s proposed policy.  Presumably it will be fine to buy a farm (or shares in a farm) and offset losses on that investment against labour income?  Presumably it will still be okay to set up a small sideline business which makes losses for several years in the establishment phase, and to offset those losses against labour income?   But not for residential investment properties (or, one assumes, for shares in companies mainly devoted to holding such properties?)   Even though setting oneself up as the owner of an investment property, renting a house to tenants, is a small business.  In fact, it is a way that many people get into business, taking risks to get ahead.

Much of the discussion in the time since Little gave his speech has been on what sort of people will be affected –  whether it is the evil “speculators”, as opposed to “Mum and Dad”.  I’m not sure if there is much data available on that in New Zealand, but they are having a very similar debate in Australia, and I was interested to see a list from Australian Tax Office data published on the ABC website as to who had claimed rental losses in Australia, by occupational group.  People can make of it what they will.  The occupational groups most likely to claim rental losses in 2013/14 were anaesthetists (28.7 per cent of them).  But 22 per cent of Police did as well.

I’m opposed to ring-fencing, if we are going to have a comprehensive income tax system.  And, I’m doubly opposed to singling out housing for ring-fencing.   If there is an economic logic to ring-fencing, apply it more generally or leave it alone.  As it happens, we tried something similar before.  From 1982 to 1991, there were restrictions put on loss-offsetting against labour income for “specified activities” (at the time, the bugbear was people investing in things like kiwifruit orchards).  Even then, loss-offsetting was limited to $10000 per annum (rather than zero).

Are there problems with the current tax treatment?  Arguably so.  Some would claim that the absence of a full capital gains tax is such a distortion, allowing people to run operating losses in the expectation of future capital gains.     As it happens, Labour proposes to address that by, in effect, imposing a capital gains tax on any sales of investment properties within five years (presumably these are typically the “speculators”).  But even if they weren’t, the argument still fails.  In even a moderately efficient market, there are no rationally-expected real future capital gains on offer across the market as a whole.  If there were, people would bid up the prices further now to take advantage of (and thus eliminate) those gains.     There are windfalls –  gains and losses –  from large actual changes in capital values of assets, but it isn’t a systematic distortion in the system.     (In principle, I don’t have too much problem with a capital gains tax that (a) applies only to real (inflation-adjusted) gains, (b) applies on a valuation basis rather than a realisations basis, and (c) treats gains and losses symmetrically.  In practice, no such systems exist).

Where there is a systematic distortion in the system is around the treatment of inflation.  In an ideal system, there would be no systematically expected inflation.  In practice, we have an inflation target centred on 2 per cent annual inflation.  As a result, roughly speaking, nominal interest rates are around 2 percentage points higher than real interest rates, and real assets should be expected to increase in value by around 2 per cent per annum, even if there is no change in their real value.      The two percentage point component of interest rates that is just inflation compensation isn’t real income (no one is better off as a result of receiving it; no one’s purchasing power is improved).  And yet it is taxed as real income.  And for those borrowers who can deduct expenses, interest is fully deductible, even though the inflation compensation component doesn’t reduce the borrower’s real income.   That is a systematic advantage to such borrowers, and one for which there is not a shred of economic logic.

In my preferred approach, the inflation compensation component of interest income would not be taxed.  And the inflation compensation component of interest expenses would not be tax deductible for anyone.    As the Reserve Bank discussion paper I linked to earlier showed, this change alone would make quite a substantial difference to how much highly-geared investment borrowers would be willing to pay.  And it would be a genuine improvement in the comprehensive income tax system as well, without singling out on class of purchasers of one class of asset.

But it is worth bearing in mind, that none of these issues can explain anything about house price inflation behaviour in the last 10 or 15 years.  Over that period:

  • the loss-offsetting rules have been much the same,
  • the introduction of the PIE system disadvantaged individual holders of investment properties relative to, say, holders of financial assets in PIE vehicles,
  • in 2005, the tax depreciation rules were tightened,
  • from 2010, depreciation on properties was no longer tax deductible,
  • the inflation target was raised in 2002, but for the last eight or nine years, inflation expectations have been trending down again,
  • maximum personal income tax rates were also cut in 2010 (reducing the value of deductibility and loss-offsetting).

Any of these “distortions” should be capitalised into the price pretty quickly once they are announced and understood,  The only new measures in the last decade or so have reduced the relative attractiveness of property investment  (and that is before even mentioning LVR controls).  It typically takes shocks to displace markets.  In principle, the advent of non-resident foreign purchasers could have been an example (in the presence of supply constraints), but we don’t have good data.  So could unexpected population growth.

We should probably also be sceptical as to how much difference ring-fencing, as Labour propose, might make.  When I was at the Reserve Bank we came and went in our views on tax issues around housing.  But the one consistent observation over the years was to point out that many different countries had quite different regimes for the tax treatment of housing.  Some allowed loss-offsetting, some didn’t.  Some had capital gains taxes, some didn’t (and all those who did had various different rules).  Some had differential income tax rates for capital and labour income. Some even made a stab at taxing imputed rentals.  But it wasn’t obvious that the differences in tax treatments explained much about the levels of house prices, or about cycles in them.    And in a well-functioning land market, land –  the asset value that is, in principle, affected by tax system changes –  is only a fairly small component of a typical house+land price.

What tax rules do is affect who owns which assets.  Thus, for decades our tax system has tended to treat all owners of investment properties pretty equally.   Loss-offsetting was part of that.   But so was the fact that we didn’t give favourable tax treatment (generally) to insurance companies and superannuation funds.  In many countries, assets held in those sorts of vehicles are more lightly taxed.  Not surprisingly, managers of those vehicles can afford to pay more for the assets, and a larger share of the assets end up in such vehicles.

Ring-fencing rules can be expected to have similar effects.     If “Mum and Dad” with one investment property can’t offset a bad year’s losses against other income, but have to carry it forward and wait for a good income year from property, while a superannuation fund with lots of investment properties can (either because it is less leveraged or because losses on some properties can be offset against profits on others) more properties will be held in such vehicles.  It isn’t clear what the public policy interest is in such an outcome?  More generally, the change will disadvantage people starting out in the rental services businesses relative to those who are better-established and have larger equity.

In the end, so-called “speculative” opportunities, on any sort of widespread scale, arise mostly because governments got themselves into the land market, and by regulatory interventions, disabled the market from working smoothly to increase supply in response to increases in demand, or changes in tastes.   Wouldn’t it be better, more in the interests of middle New Zealand (and economic efficiency) to address the problem at source –  fix the regulatory failures –  rather than falling back on rhetoric about speculators and subsidies, which at best in tackling symptoms, not grappling with causes?

Fix up the planning system and all this will be yesterday’s issue.  Fix up the inflation distortion and you’ll also have a better tax system.  But if the planning system isn’t fixed then, whatever other short-term stuff Labour does (including immigration changes) will only provide temporary relief, and in a few years time we’ll be back with the same old housing affordability problems.  What a lost opportunity that would have been.

PS.  I see that Labour is invoking the Reserve Bank in support of ring-fencing.  Perhaps the current Governor does favour such a change –  although we’ve not seen any economic analysis in support of it from them –  but if so, it is an example of a proposal which the Bank was against before it was for.    In 2005, at the request of the then Minister of Finance, a group of senior Reserve Bank and Treasury staff was asked to review policy options for dealing with house prices.  I was part of that group (as was Adrian Orr, and incoming acting Governor Grant Spencer, and the current Chief Economist at The Treasury).  There is a nice treatment of the ring-fencing issues on pages 19 to 22 of our report.

 

 

43 thoughts on “Labour on housing”

    • Yes, that’s true, and I had noticed that myself. What makes me uneasy is that the leader mentioned it not at all, not even in passing, and that after it got pretty low-grade attention in Twyford’s otherwise interesting piece last year. http://www.labour.org.nz/housing_reform

      We used to hear quite good rhetoric from the Nats in Opposition. Nothing much came of it. Given the difficulties Labour seen likely to have with the Greens in this area, the low-key mentions leave me uneasy.

      I’d really like to wrong tho, should Labour get the chance.

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    • Whoever is advising Labour on policy should be shot. How does anyone gets to win an election going around screaming “Vote Labour and I will tax you!!!”

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      • Negative gearing is helpful mainly to the newby Mum and Dad investor. The professional investor does not need negative gearing.

        There are 4 main categories of property investors.

        1. 30 year veterans have little or no debt
        2. 20 year plus veterans with less than 20% debt
        3. 10 year plus veterans with less than 50% debt
        4. Newby investors with 100% debt

        Negative gearing affects mainly the newby investors and the wannabe property investors that want to retire off an income from one or two investment properties. This voting also happens to be Labours key voting base.

        Labour would have more impact if they offered an alternative retirement income option for our aging mums and dads. If you want to cut something you have to offer an alternative path. I have suggested many times that company superannuation needs to go up to 8% employer contribution but Labour needs to remove the loophole that employers currently have which is to call a salary a total package which includes employer contribution. Therefore we need to make Superannuation compulsory to cover off this loophole that allows employers to take both employer and employee contributions out of a persons wage.

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    • The Unitary Plan took 3 years to get passed. It is now pretty much locked in, there is not much that a Labour government can achieve that the National government has not tried to do. Auckland 2040 and the Heritage and Character societies tend to get in the way.

      Auckland is a extremely long city spread over 129 km from Leigh up north to Pukekohe down south. In between there are the Waitakere Ranges with hundreds of Kauri natives and 57 sacred mounts. Central Auckland has water on 3 sides.

      The Unitary Plan has a concept called a Viewshaft that is a visual height limit. From every public park you want to see the top of each mount from eye level. This in effect limits most of Central Auckland to low rise. Thats why council created the 18 level metropolitan cities under the Unitary Plan, Manukau, Albany, New Lynn and Slyvia Park. But they are fringe cities. In most cities, low rise housing suburbs are built on the fringe. In Auckland we have built our highrise on the fringe. In most cities, the mounts would have been leveled and used for roading and building material. In Auckland they are preserved.

      The infrastructure to link up all these fringe cities is just too prohibitive. The traffic congestion is not going to go away the further you build out.

      It currently costs around $150k to draw a line for a subdivision. To build a house around $2000 per sqm. Therefore even a small house say 150sqm will cost $450k add the land cost of $300k and the costs rise to $750k. Add a developers margin and the base cost is already $850k. Therefore the only way is to build higher and to build more units to bring down the cost of land per unit and also the economies of scale for the infrastructure costs. The higher a building less earthquake strengthening is required per unit. Also a taller building has a natural resonance and is less earthquake prone than a shorter building.

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  2. Michael,

    Don’t the British have segmented income with their “schedular system”? So professional income is in schedule D and land sale profits/losses are in schedule A and you can only use revenue expenses within the relevant schedule and not across schedules.

    Perhaps we should consider adopting that here; but it would have to be a thoroughgoing overhaul and not tacking on ad hoc exceptions to a comprehensive income tax system.

    Chris Chapman

    Email: christopher.chapman@clear.net.nz

    _____

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    • Not sure of the details of the British system, but of course theirs is a system with a CGT (so they probably need to treat gains and losses on asset transactions separately).

      Personally, my first best tax system would be a progressive consumption tax (there is a lot of theoretical support for a consumption tax approach, and the progressive bit seems both fairly and politically inevitable).

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  3. Per paper: “Business activity (including rental property investment) commonly makes losses in its early stages”. True. But businesses investing in the production of ‘stuff’ typically aim to generate a profit at some point: not sure how the equity market would react if a management team announced the creation of a highly levered subsidiary with the objective of never making a profit (or banking on some long term capital gain that won’t be taxed).

    That said, all symptom. Agree that supply is the main cause – stumbled across this:

    http://www.lse.ac.uk/website-archive/newsAndMedia/videoAndAudio/channels/publicLecturesAndEvents/player.aspx?id=3786

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    • Yes, altho this is probably where Little is correct. For most “Mums and Dad”, equity will be built up over time and taxable profits will be recorded (the mortgage repayments are semi-forced retirement savings vehicle). And as others have noted, with LVR restrictions at 60% for investors, it must be quite hard to put on a new negatively-geared property.

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  5. I like all three planks to that policy announcement – as well as Twyford’s policies on planning and infrastructure. Merits or otherwise in terms of the tax system isn’t the point to my mind.

    As you’ve pointed out rightly, Michael, coming back from the dreadful place we have got ourselves into with respect to house prices (particularly in relation to our average income) is going to take throwing absolutely ever trick in the book at it to bring house prices down.

    Arthur Grimes was on the money when he commented that, if you aren’t for a 40% or thereabouts drop in the price of houses – then you aren’t really keen to address the problem of housing (un) affordability.

    I think it was Ostrom who won the Nobel Memorial prize in economic sciences for her work in common pool resource management, and she coined the phrase that if it works in practice it can work in theory. We have a bit of that in this Labour policy announcement – it may not be perfect in theory, but if it works in practice – all good. Just talking about tax reform often has the desired effect (in this case directing surplus capital into other investment opportunities, and perhaps also releasing more FHB suited accommodation product into the market).

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    • Arthur Grimes was also talking about the 50 to 60 level apartment towers in the Goldcoast which in effect lower the average house price by having cheaper apartments available the would skew the average towards lower prices.

      A drop is not a drop as you suggest but to actually skew the drop towards lower priced apartment blocks.

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  6. Under the proposed change so-called “mum and dad” investors who bought rentals as a long term investment would not be affected as most of them did not use the loophole, Little said.

    To the contrary they are the ones who will be most affected. The professional investors will have companies that will offset profitable and unprofitable houses. The mum and dad investors will not.

    And who are the most common owners. Jim Rose has an OIA on this:

    There is a chart here with the stats. deosn’t copy over.

    So only around 3,500 landlords have more than five properties while 23,000 have two to five properties and a massive 105,000 have just one. They are the ones who will be most affected. If the interest on their mortgage is more than their rental income (always the case at first) then they are deducting the loss off their other income.

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    • I think I’m missing your point. Why would it “always [be] the case at first” that the interest on the mortgage of a rental property investment exceeds the rental income? That all depends on how much capital you put into the property asset on purchase – doesn’t it? Surely anyone who purchases an asset using debt at a level that the interest on the debt cannot be repaid through income generated by the asset is speculating, right? Or is evidence of rental yield that exceeds debt repayment costs no longer required by the lenders?

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    • The average mum and dad will spend most of their working life paying off the mortgage of their home. They wake up one morning and there is no prospect of saving enough for a retirement income. They have no superannuation and they have no savings. What do they do?

      They go and buy and investment property and they hope to have that paid off by the time they retire in the next 10 to 15 years with the tenant providing that retirement income. But they start off with no savings and nothing to go against the rental and therefore they leverage 100% against the equity of their home.

      Capital gains is secondary but they will borrow 100%.

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      • Sure, I get all that, but I assume that you are answering in the affirmative to my question that, evidence of rental yield that exceeds debt repayment costs is no longer required by the lenders – have I got that right?

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      • Your statement is not correct. The bank looks at total income to offset the loan interest and repayment of debt over a 30 year loan period. They do not discriminate against age. Proof of income is based on the current employment wage and the bank assumes that you would work throughout the loan period.

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      • Well, your answer to my question is still yes, that being that, evidence of rental yield that exceeds debt repayment costs is no longer required by the lenders. In other words, the lenders are knowingly lending on loss-making rental property businesses.

        No wonder the RBNZ acted on this.

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      • The RBNZ acted on debt to equity and not on income. Let’s get some correct facts please!

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      • Katharine, so you are under the delusion that all businesses start off making a profit straight away? So why must property investment as a business make an immediate profit when most start up businesses do not? Xero still makes a loss today after years of being in business. Why is it ok for Xero to make losses year after year and it is not ok for property investment?

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      • GGS, I’ve been a small business owner and yes, the bank required data indicating profitability projections from year one and put a lean on my residential RE assets as well.

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      • Yes, the RBNZ acted on debt to equity to counter the lenders willingness to lend on loss-making assets.

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    • All the RBNZ has done with a 40% equity restriction is to create massive distortions in bank competition. The Commerce Commission should be investigating Wheeler and the RBNZ as to whether there is collusion with the banks to create a monopoly of a banks installed client base. When a competiting bank like HSBC is able to offer 3.99% 18 months fixed a couple of weeks ago and now currently 4.09% and our big Australian banks respond with interest increases closer to 4.85% typically a clear indication of monoploy behaviour.

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  8. Just read that section of the 2005 piece, Michael, covering the issue of ring-fencing. Yikes, looks to me like you had all the evidence then that should have lead you to the opposite conclusion/recommendation.

    Big red flags – surely – unless of course there is some reason why:
    – investment in potentially forever loss-making businesses was to be encouraged, and
    – the top tax rate was seen as something to be avoided (i.e., window dressing only), and therefore
    – privatising the “unlikely to be taxed” capital gains while socialising the “never to produce a profit” losses (via foregone income tax revenue) was considered the way to go?

    All that aside though, surely this was a signal that capital was being misallocated? Or do you not agree with Gareth Morgan in that regard?

    I also noted this comment;

    “Ring-fencing losses would reduce the actual and perceived attractiveness of residential property investment, particularly highly-leveraged investment in pursuit of capital gain. If the tax benefits are restricted, then the investor may recognise that the investment requires a higher net rental yield before being viable. This means the hurdle purchase price for a property with an expected rental return would be lower. This would tend to mitigate price appreciation for investment properties, at least in the short-term.”

    And of course, without that highly-leveraged investor chasing capital gain that you speak of – it would have “mitigated price appreciation” for all purchasers of property (i.e., not just those purchasing property for investment/capital gains and tax minimisation purposes). Was there no consideration of FHBs as new entrants to the market?

    I think had your advice in 2005 been to “ring-fence” losses – we might well not be where we are today current account wise – and perhaps home ownership rates would be considerably improved as well.

    Mind you, even if that had been your advice, I think MC might not have followed it anyway. As you mention elsewhere – the rampant capital gains of the era (and now beyond!!!!) saw most of us bring forward future spending intentions and that boosts GST receipts. But its a short-term gain at the cost of a great deal of long term debt.

    .

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    • Katherine, yikes you need to read more. Have you heard of Xero? They are still making losses for years now. In fact some of the largest companies in the world are running huge losses but are worth billions. Is that misallocation of resources as well? Are you not discriminating against property investors as a business?

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      • Think debt vs equity funding. The residential RE you are talking about is 100% debt funded. Completely different business/investment model to a productive/service sector start-up such as Xero with massive income/revenue growth prospects. No comparison.

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      • Income is income whether it is a business or a rental property, a loss is a loss whether it is a business or a rental property. Exactly the same thing. How is the income or the cost any different from a tax perspective?

        So why should a business like Xero make huge losses and yet shareholders can enjoy the massive capital gains tax free? How is that capital gains any different from a properties capital gains?

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    • NZ household housing debt is only a tiny $160 billion compared to household net wealth of $1.2 trillion. Nothing wrong with long term debt when that asset has inflation protection and it makes you a nice rental income for a retirement in the future. Debt is always required to be repaid by the bank. This is demanded by the bank. It is total rubbish to indicate that a investment property would remain loss making indefinitely. Rents rise over time and debt is compulsorily repaid over a 30 year term or sooner if you accelerated principle repayments.

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      • The “may never produce a profit” point is made in Michael’s piece;

        “Ring-fencing these losses would prevent an investor from realising a current tax benefit from rental property producing a loss. The net loss would be restricted to the rental activity and only be able to be carried forward to be utilised when the investment becomes profitable. Because the capital gain is not typically taxable (unless the property is explicitly purchased for resale), if a property remains heavily leveraged it may never produce a profit for tax purposes.”

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      • Yes, and for any of those commercial intentions I suspect the lender would likely require P/L forecasts and would be unlikely to lend 100% of the asset value.

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      • Yes the bank will lend 100% against your business if you have a salary from another employer and as you say provide a lien on your home to support your business shortfall. Exactly the same that they would with a rental investment property. No different.

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    • The fundamental problem with Andrew Little’s logic is that he is saying.

      It is ok to claim a loss if you are running a business.

      It is not ok to claim a loss if you are running a rental business.

      It is ok to claim a loss if you are motel business which is a rental business.

      It is ok to claim a loss if you are a hotel business which is a rental business.

      It is ok to claim a loss if you are a commercial rental business which is a rental business.

      Ok now tha Tax logic becomes really screwed. What constitute a rental business that losses are not available? Is it determined by the contract? Change the contract terms. Is it determined by the asset? Change the nature of the asset. How does short term rentals such as Air BnB affect availability of losses?

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      • It is determined by the nature of the asset – a house is a house is a house.

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      • A house can be for a number of commercial intentions. The Unitary Plan offers a number of permitted commercial activity to be run from a house.

        eg.
        1. Dairy
        2. Cafe
        3. Home business not exceeding 4 staff
        4. Pre school care
        5. Aged Retirement Care

        So a house is not always a house but is a house just not a home.

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      • Opps posted response in the wrong place above;

        Yes, and for any of those commercial intentions I suspect the lender would likely require P/L forecasts and would be unlikely to lend 100% of the asset value.

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      • Katherine, you need to check your facts. That’s not correct. The bank will loan 100% based on your income plus the income from the business.

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      • And I assume – looking for an income, as opposed to a loss, from the business. But we could go round in this circle forever, red herrings being virtually limitless in supply.

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      • Again that is a wrong and misleading comment. The bank will look at gross salary plus rental income from a rental property to service the interest and principle repayments in a similar way that they would look at gross salary plus income from business to service the loan plus repayment of the loan.

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