Frank Newman: Taxing landlords

There's a general election coming up so landlords can expect to receive more than their fair share of attention from politicians this year. They will, of course, be portrayed as greedy and unscrupulous, and the cause of homelessness, pestilence, and plague. 

We have been told countless times - and no doubt will be told many more times - that property investors receive favourable tax privileges they don't deserve. All of these condemnations are of course built on half-truths and envy. But the lie has be told so many times that many are happy to accept it as fact, buying into the idea that the punishment for those foolish enough to admit they own a rental should be public flogging and tomato throwing.

The actual fact is that property investors receive unfavourable tax treatment - they are taxed when other investors are not. The most obvious example is the two year bright-line test, which states that a gain on the resale of a residential investment property will be taxed if it is sold within two years of purchase. No such two-year rule applies to other forms of investment.

People seem to lose sight of the fact that property investors are not the only investors that make gains on resale. Some investors buy and sell businesses, shares, art, collectibles, and so on without falling within the "intention test" which treats gains as taxable income when the investment is made with the intention of resale, but the bright-line rule applies only to residential property investors, regardless of intention.

There is a case to be made that gains on the sale of capital assets should be taxed, but to be efficient it should be applied universally - including gains made on the resale of one’s private home. That is unlikely to be promoted, as few politicians have the courage to openly mention the topic for fear of upsetting a large number of voters who are also home owners. Landlords, on the other hand, are a much easier target.

No doubt some of the political yabba this year will be about extending the bright-line test from two years to five or even 10 years. That in effect, will create a capital gains specifically applied to residential property investors. It's possible, but less likely, that the bright-line test could be extended to include other assets, like commercial property, shares, businesses, art, and so on.

Besides public odium, the other thing property investors have to put up with is difficult tenants. That too is often overlooked by those who promote the public flogging of landlords. It's actually tenants who are the problem - well, it’s the problem tenants that are the problem. Applications to the Tenancy Tribunal by landlords outnumber those made by tenants by about 10 to one. Usually the landlord is trying to chase rent from some bugger who has done a runner - or they are trying to get some money out of their long-gone tenant because they trashed the place or used it as a P-lab.

Some electioneering political yabba has already come from The Opportunity Party (the Gareth Morgan party). Their tax policy would radically change the way tax is collected. In essence the policy would tax a deemed minimum rate of return on all productive assets, including housing and land.

They explain it using three scenarios. "You have $300,000; you put it in the bank and pay tax on the interest income you receive each year. At the end of the term you get your $300,000 back. Alternatively you buy a house and rent it out. You pay tax on the rent received, and at the end you sell your house and get your $300,000 back again. So far very similar scenarios. Now thirdly you buy a house and you live in it. At the end of the term you sell the house and get your $300,000 back again. The difference with the third scenario is you have received a benefit from living in the house for all those years, but no tax has been paid on that annual benefit of ‘free’ accommodation. There’s the anomaly, it’s called imputed rent and if we’re interested in our tax regime being fair and not influencing how people invest their money, then we need to charge tax on imputed rent each year."

So that's it in a nutshell - homeowners would pay income tax on money they have not received, but would have received had they rented out their house. An academic may describe this policy as "pure and beautiful" - others would describe it as weird. Good luck selling that one to voters!