Why buy an investment property?

Purchasing a residential property as an investment is an excellent way to grow wealth over the long term and (if properly structured) minimise your tax bill. In fact, New Zealand is a good place to buy an investment property for the following reasons:

• No capital gains tax
• No interest clawback
• No stamp duty
• No limit on losses claimable
• Favourable depreciation rates
• Stable interest rates
• Strong demand for rental accommodation
• Stable government policies
• Increasing population

One must recognise however that owning investment property is a business and you must consider all the impacts this will have. There are legal and taxation issues involved in owning a property from which you earn income, which you must consider before you buy. This guide is intended to highlight these.

You must also consider how your property will be managed, and what is involved in presenting it to potential tenants. Many real estate agencies and companies offer property management services, but the normal charge for this is 7-8% of the rental income, which should be considered when weighing up the overall investment.

The first thing to consider is why you are investing in property and what you wish to achieve.

Am I an Investor / Developer / Trader ? - What are the differences?

Investment involves the purchase of a property for the long term with the intention of enjoying an income via the rental stream. Any eventual gain on sale is capital and tax-free. No GST registration is required.

Development is typically where the property is purchased with the intention of completing work that will add value and result in a profit on sale. The profit is taxable in the year the property is sold. A developer must be GST registered.

Trading occurs when somebody buys and sells properties frequently. If trading is undertaken with a view to selling at a profit, the profits are taxable. The Inland Revenue Department considers trading is taking place when a regular pattern of buying and selling is established. Traders must be GST registered.

next: Types of Housing

The information on this web site is of a general nature only. Readers are advised to establish the applicability of information in relation to specific circumstances and not to rely solely on the information provided here.