Retired landlords hit hardest

Residential landlords who are retired could be hit hardest if tax changes floated this week are enacted.

Aaron Quintal, a tax director for Ernst and Young, calculated that a wage and salary earner would suffer less than a superannuitant under the proposed changes.

Mr Quintal found retirees who depended on rental investments stood to lose a far higher percentage of their total income if the proposals were enacted.

This week, the Tax Working Party floated the idea of turning the residential sector's tax write-offs into tax gains.

Axing depreciation on buildings (now 3% per annum), ushering in a new land tax at 0.5% of the value of property, but excluding farms, and cutting the top personal tax rate from 38% to 30% are just some of the options which could hit the $200 billion housing rental sector hard.

Mr Quintal used the example of a rental property worth $360,000, the Real Estate Institute's latest national median price.

A wage-and-salary-earning landlord getting $90,000 gross annually on PAYE tax would get the biggest breaks from the changes, he said.

That is because although they could be disadvantaged by many moves in the proposed shakeup, the drawbacks would be offset by a cut to PAYE tax.

Proportionally, the wage-and-salary earning landlord would suffer much less than the retiree because the amount of money they would lose after the changes would be only a tiny portion of their overall financial status - income and tax deductions.

But even if pensions rose, as PM John Key pointed to this week, Mr Quintal said he would be more concerned about the position of superannuitants.

They would also be stung by the tax changes but without the benefits of being able to gain as much financially from the tax cuts, he said.

The wage and salary earner can already claim about $6700 in the existing benefits of depreciation and mortgage interest payment deductions.

But Mr Quintal said those landlords' total benefit from depreciation and interest was in fact much larger at $24,960 under this scenario.

That is because although rental income was $18,200, the landlord could depreciate the building by $4800 and claim all interest costs of $20,160.

Although the retired landlord was able to claim the same benefits, the same massive gains were not available because they are on a much lower income and therefore a much lower tax rate, Mr Quintal said.

Sue Tierney, president of the Auckland Property Investors' Association, said if all the tax suggestions were implemented, retired investors would be severely affected.

She said it was a common misconception that property investors were earning large amounts of money and estimated most only pocket about 50% of what they received in rent.

"Many of them have worked hard for 20 or 30 years to build up their portfolios.

"They've scrimped and saved to make sure they aren't relying on a benefit," said Mrs Tierney.

Alan Scott, BDO national tax director, said landlords had enjoyed tax benefits for far too long.

"They've had it pretty easy for quite some time.

"They've been getting deductions for their losses yet also getting a tax-free capital gain when they sell the property.

"Some people regard rental property as a tax shelter," he said.


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