OnPoint by Keith Ng


Property Investment Federation: Just STFU

Let's not beat around the bush here. The Property Investors Federation is full of shit. Completely and utterly full of shit.

(Dear Lawyers, I do not mean literally “filled with faecal matter” as a statement of fact. I mean “full of shit” figuratively, which I am confident will be considered honest opinion – as in “honestly, it is my sincere opinion that they are just figuratively full of shit” – under defamation laws.)

Yesterday, 11 March 2010, TVNZ reported:

The Property Investors Federation estimates that, on average, landlords could miss out on $1,750 a year by not claiming depreciation. This works out to be approximately $34 a week. It is believed most of that will be passed on to tenants.”

On 20 January 2010, the Federation said in a press release (emphasis added):

Many rental property owners have purchased their property on the basis that they can claim depreciation as an expenses but that they will have to pay this back should they sell at some time in the future. Depreciation claims by rental property owners help them to keep the cost of renting lower, especially in the first few years of ownership. If the ability to make depreciation claims are withdrawn from rental property then many owners will be forced to sell their property as they will no longer be able to finance them.”

So, two months ago, deprecation wasn't real money because they have to pay it back. But now, they forget about the fact that they would have had to pay it back, treat it all as a cost and say that tenants will be paying for it.

Full. Of. Shit.


This is the public service part. This stuff really, truly belongs with the tax nerds, but I guess this is why property investors have manage to rort the system for so long. It's no fun, but hopefully this actually explains what the issues are behind the “debate”.

How depreciation changes will affect rent needs to be broken down into two parts: a) How much it'll actually cost landlords, and b) How much of this cost will be passed to renters.

Here's how depreciation works:

* You take the value of your house (just the building, not the land). Let's say, for ease of calculation, the building is worth $100,000.

* Each year, it depreciates by a set amount. So, if the depreciation rate is 3%, then you have a depreciation of $3,000.

* Your house's is now worth $97,000 on paper, but you can claim this $3,000 “loss” as an expense so you pay less tax. Let's say, $1,000 less tax.

But here's the kicker:

* If you sell your house $100,000, but it's book value is $97,000, then the IRD sees that the depreciation wasn't real, and makes you pay back the $1,000. This is called depreciation recovery or clawback.

In theory, depreciation isn't free money. Either it's real, in which case the property owner actually lost value, or it's not, in which case the owner has to pay it back (but gets to keep the money for a while, like an interest-free loan).

Losing $3,000 of deprecation may just mean “losing $1,000 of tax credits that I'd have to pay back in 10 years anyway”. So to take the face value $1,000 and say that “this is how much landlords will have to hike rents to not have to sell their children” is misleading.

(In practice, you don't sell the building and the land separately, and you don't get taxed on capital gains on the land, so you can put all the depreciation on the building and call it a loss, and put all the gains on the land and not pay any tax on it. But it takes a bit of creative accounting and there are limits, so it's not a rort-buffet.)

The more important point is that landlords aren't feudal lords. If their costs go up (or their profits go down), they can't just say “well, screw that, let the tenant pay for it”. People have choices. If landlords choose to hike their rents, people can choose to live with their parents, move in with flatmates, leave the country, or buy a house. Fewer people in the rental market will push rents back down again – even for people who can't move in with parents/flatmates/leave etc.

Put it this way. If landlords could really make their tenants pay the full cost of the changes, would they really be bitching about it so much?

Of course, this means Trevor Mallard's own back-of-a-napkin adventures were even more full of shit.

My calculation is that the average residential rental property will inolve [sic] a loss of about $45 to the landlord v current depreciation arrangements.

(Average house price 416k but I’ve used median 360k. 2% depreciation = $7,200. 33c tax rate = $2,400 say $45 per week)”

As he acknowledges in his update, he included land values, so he massively overstates the cost, and he didn't even consider clawback. The curious thing is how his clearly, completely and massively wrong estimate ended up being in the same ballpark as the Property Investors Federation's completely unsubstantiated figure...

Oh. Right.

Full. Of. Shit.

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