There have been many comments in the media recently about rental property owners having a tax advantage over home buyers and can therefore afford to pay more for a property. This is technically true, however the difference is so small that it doesn’t make any practical difference.
There is a clear difference between home owners and rental property owners. Both own a property, but only the home owner gets the benefit of the shelter that the property provides. The rental property owner effectively sells this benefit to a tenant and receives rental income instead of shelter.
While the investor can claim expenses to reduce the tax they pay on their rental income, the property owner has no income to subtract expenses from.
By renting out the property, the owner is running the property as a business and is treated in the same way as any other business, such as a car rental company.
A car rental company receives income by selling the right to use their cars. They deduct all the costs involved in running their business and pay tax on any surplus. Private car owners, however, cannot deduct the expenses they incur in running their privately owned car.
To be consistent, people who think that rental property owners should not be able to deduct their expenses for tax should also believe car rental companies cannot claim expenses either.
An area where rental property investors do have a technical advantage over home owners is in buying the property in first place.
Consider an investor and a home owner at an auction. Every extra dollar they bid trying to win the auction will probably need to be borrowed. This means that the annual mortgage interest cost will increase with every bid they make.
While the mortgage interest cost of each bid will be tax deductible for the investor, it won’t be for the home owner. On the face of it this is a clear advantage for the investor. But let’s look at the numbers.
At a 6% mortgage interest rate, every extra $1,000 bid for a property will cost the home owner $60 a year in extra interest costs. Because mortgage interest is tax deductible for the investor, however, their annual cost for an extra $1,000 bid on a property is $40.20.
So yes, the investor does have an advantage in bidding for a property, but at $19.80 a year it is so small that it doesn’t actually have any significance. Even bidding an extra $10,000 for a property will only be $198 a year cheaper for the investor than the home owner. It is extremely unlikely that anyone would bid an extra $10,000 for a property just because it is $198 a year cheaper for them to do so.
A larger incentive to outbid another potential buyer is a larger deposit and therefore a lower level of required borrowing.
In the year ended March 2013 there were 76,122 property sales, 11,122 more than the year before. In the same year ended March 2013, 11,733 first home buyers used Kiwisaver to help them with their deposit.
It appears that first home buyers access to extra deposit funds is probably having a larger influence on house prices than any theoretical tax advantage that rental property owners have.comments powered by Disqus