Cash-strapped landlord welcomes prospect of full tax deductibility

An Auckland landlord who stands to be thousands of dollars better off each year under National’s promise to reinstate tax deductibility on rentals says that this will make property investment viable again.

The landlord, who asked to be referred to only as Graham, told NZ Adviser that zero tax deductibility would add around $10,000 per year to the cost of owning his rental property.

“I’ve been bleeding money hanging onto the rental … when you do the numbers, rental property investment just isn’t good at the moment,” Graham said.

National has promised to reinstate full tax deductibility on rental properties, confirming that it would adopt a phased-in approach.  The current level of 50% deductibility would be maintained in April 2024, increasing to 75% in April 2025, with full deductibility restored from April 2026.

With the form of the new government still to be determined, it is uncertain how quickly tax deductibility will be reinstated, ACT having confirmed that its policy was to “immediately reinstate” mortgage interest deductibility from April 2024.

Graham said that the mortgage on his rental property was around $650,000 and that based on an interest rate of around 6.5%, he paid $42,250 annually in interest.

He receives $33,800 in rent annually, amounting to shortfall of $8,450 per year  or $12,000 including other expenses such as rates and insurance.

With zero tax deductibility (under the Labour government’s policy, this would apply in April 2025), his rental property would cost him upwards of $20,000 per year, he said.

“A $400 weekly loss his hard to carry … when full deductibility returns, it’s a $10,000 annual difference so then I won’t need to make as much of a capital gain to break even,” Graham said.

As a landlord who is using property as a way to save for his retirement, Graham said that he took exception to the reference to interest deductibility as a “loophole” when the rules were changed in March 2021.

“Landlords have been viewed as bad for first home buyers but they also provide a service by increasing rentals for those who can’t or don’t want to buy,” he said.

Graham said that he had long considered selling the property, but with many commentators expecting the property market to rise over the next few years, the prospect of full tax deductibility returning made the question of whether to hold onto it a more valid one. 

“Mega-landlords” stand to gain $1.3 million each - NZCTU

New Zealand Council of Trade Unions economist Craig Renney (pictured below) said in a media release issued on October 10 that the removal of mortgage interest deductibility was likely to see “mega-landlord” each make more than a million dollars extra, while those receiving disability benefits would see their incomes fall by more than $17,000 across the same period.

Based on the average benefit that landlords would receive, Renney said that over five years, National’s tax cuts would give $1.3 million to each of those landlords with more than 200 properties.

“Over five years, this group of 346 mega-landlords would collectively gain nearly half a billion dollars in tax breaks,” Renney said in the release.

Renney told NZ Adviser that the calculations were based on Inland Revenue data on the cost of tax deductibility on rental properties and the number of private rental properties in New Zealand (510,000, excluding state and third-sector rentals) which were used to calculate an amount per rental property.

The analysis also used research showing the number of landlords with over 200 properties (those with 200 active bonds lodged against them), estimating that if they made the average amount of money, they would be making $1.3m across the period.

Interest deductibility was calculated by National as costing $2.1bn over four years, while Inland Revenue analysis suggested it would cost $3.4bn over five years, Renney said.

The calculations were undertaken for the purpose of highlighting the winners and losers as a result of National’s package, he said, noting that it represented “quite a lot of money” in the pockets of landlords.

“If you just took National’s numbers at their face value, you’re going to take $2 billion off beneficiaries in the forms of changing the indexation and give almost an identical amount of money to landlords,” he said.

“Some of those landlords, just mathematically, are going to make enormous windfall gains.”

Renney said that the reporting also showed that landlords not currently geared due to current interest deductibility rules will be geared “pretty quickly” as they could write off some of the cost of the interest under interest deductibility.

“You can essentially borrow money against your own portfolio, expand your own portfolio and the Crown pays it back,” he said.

What is your view on National’s plan to reinstate tax deductibility on rental properties? Share your thoughts in the comments section below.