How to Tax Speculation in the Auckland Property Market
massey-university
Fri May 15 2015 12:00:00 GMT+1200 (New Zealand Standard Time)
How to Tax Speculation in the Auckland Property Market
Friday, 15 May 2015, 11:33 am
Press Release: Massey University
How to Tax Speculation in the Auckland Property Market
A Massey University tax specialist says the best way to fairly tax the capital gains on property is to use the “well-established principle of apportionment”.
Dr Deborah Russell from Massey University’s School of Accountancy says property investors can currently claim all the interest on their mortgages as a tax deduction, while paying no tax on any gain in value if the property is sold.
“Although investors in the property market claim otherwise, it seems obvious that at least part of their reason for investing is to collect untaxed capital gains,” she says. “If those gains are untaxed, then it seems unfair for them to be able to deduct the full cost of any interest as well.”
Dr Russell believes a proportional deduction for interest on residential rental properties is the simplest and fairest way of mitigating this problem.
“If a person’s own investment is equal to the amount borrowed for the property, then they could get a full interest deduction,” she suggests. “But if the owner has put in only, say, 25 per cent of the cost price, and the bank is putting the other 75 per cent in, then the investor would only get a partial deduction, of say half the interest expense.
“The lower the owner’s investment in the property, the lower their interest deduction would be. Over time, as the investor reduces the amount owed through mortgage payments, they would be able to claim a higher proportion of the interest expense.”
Advertisement - scroll to continue reading
Dr Russell says any tax-based response to the housing crisis should affect only speculators, have no perverse consequences and be consistent with other tax laws. She believes the tax mechanism she has described fits the bill.
“Tax law routinely requires businesses to apportion expenses between private and business activities, between taxed and untaxed activities, and between local and foreign enterprises,” she says.
“And we already have precedents for this type of apportionment. Holiday home owners can only deduct some expenses to the extent that their property is actually rented out, shareholders in look through companies can only claim losses to the level of their real investment in the company, and thin capitalisation rules limit the interest deductions that can be claimed by companies owned by overseas investors.”
Advertisement - scroll to continue reading
a.supporter:hover {background:#EC4438!important;} @media screen and (max-width: 480px) { #byline-block div.byline-block {padding-right:16px;}}
Using Scoop for work?
Scoop is free for personal use, but you’ll need a licence for work use. This is part of our Ethical Paywall and how we fund Scoop. Join today with plans starting from less than $3 per week, plus gain access to exclusive Pro features.
Join Pro Individual Find out more
Find more from Massey University on InfoPages.