Change breeds uncertainty, uncertainty breeds doubt, doubt breeds fear, fear leads to indecision and inaction. And so it is that we see the market weakening as change, particularly that in the tax system, starts to impact demand for investment property.

But changes in the tax system (especially those designed to alter human behaviour in order to bring about social change rather than the more traditional use of the tax system – to actually fund government spending) are just levers that get pulled to bend and twist an otherwise strong and robust market.

Behind the manipulations governments throw up, is a fundamental demand for property and housing from a growing population. This will always underpin the supply and demand equation when playing the long game.

Be Brave

Now then, we all know that the best time to buy property is counter cyclically, but that requires us to overcome our fear and act decisively when others are hiding under a rock.

Overcoming fear is something you can achieve by undertaking good due diligence and gaining a deeper understanding of what change really means.

Let me explain by using the example of the proposed ring fencing of residential tax losses.

Most people’s reaction to this announcement was negative – tax savings from offsetting losses against other incomes has after all helped us afford investment properties when funding costs exceed rent.

But proper analysis of the proposed legislation throws up some interesting notions.

Firstly, consider the rules relative to your own position. Most of us have between one and four investment properties and normally to progress beyond one requires you to have accumulated some equity. At a time when residential rental yields are approximately 4% and interest rates are also circa 4%, we realise that if we have even modest equity in our investments we are unlikely to actually have cash losses anymore. The days when losses were artificially bolstered by depreciation are gone. A survey of our own client base indicated approximately 80% of our investor clients to now be profitable and paying tax.

Secondly, a study of the issues paper on ring fencing reveals that the Government is likely to ring fence on a portfolio basis rather than a property-by-property basis. Why? Because property-by-property is simply too problematic.

This means that if you buy a property that does make a rental loss but have an existing portfolio of profitable property you can still offset the loss against your rental profit and get the same tax saving you always did.

It’s only the poor sod who is trying to buy his first property and only has personal income that will be impacted.

Will It Work?

So will the Government’s use of this lever work to reduce prices? Possibly, but only for as long as it takes people to work out the actual impacts of the rules and how to manage life once they are law.

So by pulling this lever, the Government creates a horrible distortion between the haves and the have-nots, and ends up with bad law that will no doubt be repealed when the next change in leadership occurs.

Even the five-year bright-line test is not the death blow it might seem. The power to manage the tax outcome from the bright-line test rests with the property owner. Keep it for five years and the rule has no impact.

Even if you do sell within five years you are keeping 67% of the gain on disposal, so are you better off having made the decision to buy? Of course you are.

The point is that by thinking deeply about changes and analysing them carefully, you can take the fear away and give yourself the confidence to act counter cyclically. And that my friends, is where the gold lies.

If you have any queries or would like to know more, feel free to contact Withers Tsang and talk to one of our tax experts.

Mark and his team specialise in advising on property-related transactions, valuation and restructure services, and tax planning. Withers Tsang & Co Phone 09 376 8860, www.wt.co.nz