Well, what a day!!! To be sitting at a café yesterday debating the possible budget changes to last night, reflecting on the changes and today handling a barrage of calls and emails. We have the answers and yet the media got it wrong, it is not until today that they seem to be giving some clarity.
Last night, Budget Day, the media comment in summary was “Depreciation, here today gone tomorrow” In reality it is a very different storey. The media often takes a holistic approach which is fine for the majority, but to investors the details of the story is key!
Overall we’re very very happy! We think it is the best possible budget investors could have hoped for given the commentary leading up to it. Yes a reduction in total depreciation claimable will result in changes to cash-flow, but the ring fencing of losses, which has not been introduced, would have been far more detrimental!!!!!!
What frustrates us the most is the media portrayal that as an investor you can no longer claim depreciation – this is rubbish! You can still claim depreciation on anything that the IRD deems is not part of the building. For those of us with 31 March tax year end, the depreciation rate for buildings will reduce from 3% DV (Diminishing Value) to NIL from 1 April 2011. Most importantly, you still claim depreciation on the assets that the government agrees go down in value, namely the chattels and most fit-out items. There are a number of positives to be gained from this! Although investors will not get the cash-flow advantages they have been used to, new investors will not be faced with is the DEPRECIATION RECOVERY when they sell the property, meaning far less uncertainty come sale time..
For residential investors the path is now clear and we have every answer needed. A few weeks ago the IRD released an interpretation statement that clarifies what is “Buildings” and what is separately identifiable for depreciation purposes. The answer in summary is that the Structure, plumbing, plumbing fixtures, electrical reticulation, kitchen cabinets, non load bearing walls, tiles, vinyl and garage doors are considered by IRD to be part of the “Buildings” for depreciation purposes. From 1 April 2011 these items depreciate at 0% but almost everything else can be claimed at higher rates. Fantastic!
For commercial property however, there is still confusion. The interpretation statement that came out for residential does not apply in full to commercial. This was highlighted in the budget, with commentary that commercial property is now to undergo a review to determine what constitutes “Buildings”, and what can be separately depreciated.
To us at Valuit, (specialists in providing investment property depreciation schedules), the key aspects of the budget are;
The reduction of the depreciation rate for commercial and residential buildings from 3% to 0% (effective from start of next financial year) where they have a useful life of 50 years or more
- CONS – reduction in cash-flow (Note, for the majority of investors most of the reduction should be countered by personal tax reductions)
- PROS – you can still claim depreciation on most fit-out and all chattels.
- PROS – you will not be faced with a large depreciation recovery bill when you sell, due to the excessive building depreciation you have claimed.
- PROS – when it comes to asset protection, the potential depreciation recovery will not hinder your decision to protect your assets by transferring them to a trust.
The income within an LAQC will be taxed as per a “Limited Partnership”.
- CONS – When making a profit the income will be taxed at the personal marginal tax rate, which may be higher than the company tax rate.
- PROS – You can still utilise the losses you may have and reduce your personal tax rate. (Note the accounting requirements to do this may have now changed a little)
There are a few other finer details here to be sorted!
The 20% loading currently applied to new property has been removed for property purchased after budget day. Yes this will have an impact on the purchase of a new property but we think the key here is to reflect on why this loading was introduced – to incentivise business investment into new plant and machinery, and NOT to incentivise people to invest in new property.
Overall we think the budget has been very fair. It could have been worse and as always it could have been better. But from a depreciation perspective we think it has been OK.
The key for investors is to remember that despite the reduction in depreciation, most of this should be offset through tax rate reductions and some minor rents increases, but above all, make sure you are claiming the maximum depreciation you can! If you haven’t yet had a split on your purchase price get it done now and make sure you are taking full advantage of our new taxation system.
Valuit – the depreciation specialists
Low Interest Rates Winners and Losers
Lower mortgage interest rates is a big deal for most homeowners and buyers.
Existing homeowners can hunt around for a better deal with the same or another lender and in the process save hundreds, if not thousands of dollars on interest payments. Even if a borrower is locked into a fixed rate deal on a fixed term, it often pays to break it and reap the rewards of paying a lot less interest.
For first time home buyers, lower interest rates can be the difference between renting and owning a home. Existing homeowners trading up or down, see lower interest rates as a great time to sell and buy too, Therefore there is always a frenzy of activity in the mortgages sector when there is movement in interest rates and there will be winners and and there will be losers.
Winners and Losers
Lower interest rates sends a signal to vendors with homes to sell, that there are more buyers in the market. This can get unsold properties sold which is a win win for vendor and buyer.
More buyers in the market, however can also push the sales price up, as vendors aim to get the best price and there can be only one buyer, the one who is willing and able to pay the most.
In this situation it’s more of a win for the vendor. The eventual purchaser is likely to have paid more than they were comfortable with and thus borrowed more to get the property. Plus there were many buyers locked out by the higher price.
First Home Buyer Tip
The tip for first home buyers is to always be ready to take action as soon as the timing is right.
For first home buyers, it’s always a good time keep a financial advisor or broker up to speed on your personal financial position. This way when the timing is right, like a downward move in interest rates, you can just ask the question:
“What can I afford to borrow, now the interest rates are lower?”
There is no such thing as one size fits all when it comes to borrowing money. Your position will determine how high risk you are to a lender.
A trusted advisor in the know, can act fast on your behalf when lending conditions favour you. Lenders who see you a good ‘investment’ will be keen to move quickly too, to secure your business and thus beat their competition, i.e. other lenders.
Recent news of an OCR rate drop by the RBNZ, spread like wildfire around the country and the early worm is sure to get the best deals.
Homeowners with advisors already up to speed on their current position, will be busy acting on their behalf, to find the best deal saving their clients hundreds if not thousands in interest repayments over the term of their loan.
Property price increases have cooled in Auckland, increasing by just 1.7 percent compared to the previous year. Listings too have been lower, however that’s all about to change. More buyers, trigger more listings and with more buying power, higher property prices.
Timing is everything, so whatever your circumstance, talk to your mortgage advisor and act on the deal that’s right for you.
Property Listings Drought Adds Fuel To Fire
A property listings drought is adding further fuel to our over-heated property market. Property prices are increasing everywhere except Taranaki according to Trade Me Sales Price Index and that’s got the RBNZ considering further action to curb demand.
The RBNZ’s LVR restriction on Auckland property investors has done little to dampen their appetite and many have also moved their focus to other areas where property prices have been on the increase since October 2015.
The listings drought suggests most home owners are electing to improve their properties using the equity in their homes over moving house. Some Aucklanders have chosen to leave the city for change of lifestyle and Tauranga has been one of the main benefactors as well as the region of Hawkes Bay.
Curbing demand is how the RBNZ want to deal with the property market and they’re considering a variety of measures. Bernard Hickey in a news item on NZHerald believes we’ll know more on the RBNZ’s next move in the second half of 2016. Bernard mentions two dates in particular: 19 August is the deadline for Auckland Council to accept all or some or reject all the Unitary Plan. The Government is hinting at wading in if the Unitary Plan does not meet their goals of an Auckland growing up and out to meet new housing supply targets.
The other date to watch out for is 30 November. On this day the RBNZ presents it’s Financial Stability Report. One of the measures under consideration by the RBNZ is the fixing of the income to loan ratio.
From the news item on NZHerald
“The Reserve Bank helpfully included a chart in this week’s report that showed around 35 per cent of owner-occupiers and 60 per cent of investors had borrowed more than 5 times their income.”
New rules are coming and if what’s happened to date is anything to go by the RBNZ is not shy at taking action so keep these dates in your diary. No doubt investors are now very aware of their income to lending ratio and will be taken the necessary steps to survive the next round of RBNZ restrictions.
This blog article was written for PropertyBlogs by Mobilize Mail.
How Low Can Mortgage Rates Go?
News of lower wholesale interest rates suggests we may be in for another round of super low home loan interest rates as early as next week. A news item on interest.co.nz provides examples of the correlation between swap rates and the mortgage rates with one example being SBS Bank’s one year rate as it was back in November 2015.
News of lower wholesale interest rates suggests we may be in for another round of super low home loan interest rates as early as next week. A news item on interest.co.nz provides examples of the correlation between swap rates and the mortgage rates with one example being SBS Bank’s one year rate as it was back in November 2015. At the time their rate was big news as it was the lowest at 3.99% while the one year swap rate was at 2.72%.
Fast forward to February 2016 and SBS Bank’s one year rate is at 4.35% while the one year swap rate is currently lower than it was back in November, its currently 2.58%. A downwards move is predicted and SBS Bank could move back to where it was in November 2015 at 3.99% or go even lower.
It really just takes one lender to make a move and the other lenders are sure to follow. Borrowers in the know are regularly speaking to their mortgage broker to keep up to speed on the best deals and terms on offer.
So how low can mortgage rates go? Possibly lower than they were in 2015.
This blog article was written for PropertyBlogs by Mobilize Mail.
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