Tax changes could 'cause house prices to fall'

Tax changes on residential property investments could lead to investors pulling out of the market, causing house prices to fall, investment adviser Martin Hawes says.

The Tax Working Group has recommended removing the ability to claim depreciation on a rental property or taxing an investor's net equity in an investment property among its options to curtail New Zealanders' passion for property investment. Both options would suppress demand for investment property because they both hit at cashflow, Mr Hawes said.

Unlike a capital gains tax, which was paid only when a property was sold, a tax on the gain in the net equity of an investment property based on a nominal rate of return, or the removal of depreciation, was an annual cost.

Many property investors relied on being able to claim depreciation as part of the cashflow for a rental property and used it in their calculations to borrow, Mr Hawes said.

"This is quite a major part of a lot of the promotion of property investment. The way it is sold is the taxman is paying part of your deficit."

Mr Hawes said if either of the tax changes were introduced the Government would need to mount a strong educational campaign to show the value of other asset classes, including shares. "My worry is that if you make property investment unattractive, people will just go to term deposit or maybe bonds, but will continue to shun shares."

The working group says tax rules around residential property are unsustainable. About $200 billion was invested in rental houses, generating $500 million of tax losses.

Deloitte managing partner Thomas Pippos said the proposed changes highlighted that mum and dad investors should not be investing in residential properties for tax reasons. "One of the real certainties is that the current status quo in relation to residential property investment is not sustainable."

Removing the ability to claim depreciation was the easiest and fairest option to implement.

"The way you should view depreciation on a residential property investment is a subsidy, because it is not something you actually incur," Mr Pippos said.

While there were some tax advantages to investing in property, the biggest gains were from the property increasing in value over time, he said.

People would continue to invest in houses because "it is something they can touch, feel and understand". But they would no longer receive the effective tax-based subsidy by being able to claim depreciation.

- © Fairfax NZ News