NZ Herald 28 April 2018

AWho knows? Nobody surveys everyone who bids at an auction, and even if they did I’m sure many people wouldn’t answer honestly.

But you’re probably right to some extent. When someone falls in love with a property they plan to live in — and before the auction they are already thinking about where they will put the couch — they may be more likely to get carried away at the auction.

However, I also think you’re crediting would-be landlords with more cool headedness than many may have. The media have been full of stories of people buying a rental property and selling it a few years later for twice or three times as much. That must make others really keen to jump on the landlord bandwagon.

If you’ve done your homework before an auction — whether you’re hoping to buy a home or a rental — you will have had a builder or other expert check out the soundness of the building. You will probably also have lined up finance, thought about how a quick do-up would improve the place, checked out the neighbourhood, researched what nearby properties have sold for recently, discussed the possible purchase with your lawyer, and so on.

After putting all that time and effort in, it can be hard to see your work coming to nothing. And in the heat of the auction, it’s easy to think that one further bid might knock out the other bidder. You don’t want to lose when just one more thousand dollars would get you the place.

I’m sure would-be landlords are not immune from this feeling. And even if the eventual winner at an auction is a homeowner, I bet the inclusion of landlord bidders pushes up the price.

So my reply to your question: “What sensible investor would pay over the odds, or go mad at an auction?” is that not all would-be landlords are sensible.

Turning to your comment about rate of return, I note that you’re using a gross rental yield — excluding expenses such as mortgage interest, rates, insurance, maintenance, and body corp fees. The gross yield is useful when, for example, you’re comparing one property with another. But the would-be investor should also always look at their net yield after expenses — including an allowance for periods when a tenant doesn’t pay or there is no tenant.

It’s not uncommon for the net yield on a rental to be negative. The landlord has to put in money from other sources at least for several years to make ends meet. Which leads into our next Q&A.

ALet’s get it straight from the horse’s mouth. Inland Revenue says that the tax you pay when you sell a property depends on:

• “Your intent when you purchased.
• “Your history of buying and selling.
• “Whether you’re in or associated with the property industry.
• “Whether you buy and sell a property within five years (two years if the property was purchased on or after 1 October 2015 through to 28 March 2018 inclusive).”

The IR website goes on to say — in very user friendly language: “Nearly everyone buying a property will sell it at some stage. Most people will hope that their property will gain in value, and we know that an increase in value is common. However, this alone isn’t enough for any profits to be taxed. In most cases you don’t have to pay tax on the eventual sale of your family home. If you bought a property as a long-term rental, then you may not have to pay tax on the sale either.

“However, when a property has been bought with the firm intention of resale you’ll have to pay tax on any profit from the sale. The intention to sell does not need to be the main reason for buying the property — it could be one of a number of reasons for buying.”

There’s more that touches on the family home issue. “If you have a pattern of buying and selling property, then you may be a property dealer and may have to pay tax when you sell property, even on your family home.”

I’ve known people who have repeatedly bought their own home, done it up and sold it fast. So — while of course that’s not usual despite your comment — it seems they should have been taxed on their gains.

I should note, here, though, that the bright-line test — that bit about owning a home for five years or two years — specifically excludes the family home.

For more from Inland Revenue, see www.ird.govt.nz/property/property-selling/.

If I were one of your clients and I had bought a rental property, I certainly wouldn’t be saying to you — or anyone else if I was wise — that I had my eye on selling at a gain. And I suppose some people don’t ever plan to sell.

But rental property is not a great investment in retirement, because of the hassle and the fact that you receive only rent and can’t spend the capital. I suggest to retirees that unless they have plenty of other income, it’s a good idea to sell a rental when they retire. And I’m sure many people have worked that out anyway.

So when someone says they bought a rental without intending to sell it at a profit, I’m inclined to say “pull the other one!”

Good on you for pointing out that people shouldn’t count on property prices growing. But, as you say, the long-term trend has been largely upwards — despite some downturns — and it seems silly to argue that people don’t have an eye on gains.

As I said in today’s first Q&A, many landlords make losses on their rental properties for quite a few years. They can’t really argue that they didn’t buy planning on a gain when they sell. Otherwise the investment makes no sense.

The main problem here is that a law that depends on intentions is unworkable. Hence the need for the bright-line test.

Here’s hoping the Tax Working Group comes up with something that works better on capital gains on property, shares or anything else — and the government adopts it.

I know there are big problems with capital gains taxes overseas. But New Zealand has a great opportunity to learn from everyone else’s mistakes. After all, we’re one of the few developed countries that don’t have a capital gains tax, so there are many regimes we can learn from.

Whatever we do, it won’t be totally fair to everyone. That’s an impossible dream with taxes. But the current system — with people taxed on the income they earn from work while others are not taxed on the income they earn sitting around doing nothing — has got to be less fair.

AFor those who missed the story, it’s about a house in western Sydney that recently sold for $1.1 million. And you make a really good point.

Any online compound interest calculator will confirm what you’ve said, that the growth is about 10 per cent compounded. Many people don’t realise how powerful compounding growth is.

What’s more, if you look at the photos that go with the story, that house looks pretty flash. I lived in Sydney a little more than 30 years ago, and I know most western Sydney houses didn’t look like that back then. I suspect the owners have put lots of money into upgrading the house in the meantime. The cost of that should of course be subtracted from the gain — something property investors sometimes forget.

How the sharemarket has done over the last 30 years depends to some extent on whether you’re looking at the NZ market, the Aussie market or the world market. But yes, returns on shares over that period have been similar to 10 per cent a year. And just last year, for those who hadn’t noticed, New Zealand shares rose 22 per cent.