Trevor fails Maths 101
March 12th, 2010 at 7:28 am by David FarrarTrevor posted at Red Alert:
My calculation is that the average residential rental property will inolve a loss of about $45 to the landlord v current depreciation arrangements.
(Average house price 416k but I’ve used median 360k. 2% depreciation = $7,200. 33c tax rate = $2,400 say $45 per week)
Can John Key guarantee that all families that rent their houses and get this increase as well as that in their GST will not be worse off.
Now Trevor has been slaughtered in the comments there for his basic errors, he has done a partial retraction:
Comments below have suggested that my estimate is high because I haven’t taken out land prices. Other emails have suggested that there are higher depreciation rates and that because a proportion of rented premises are apartments land is not quite the issue some suggest. I’m happy to use the property investors $34/week figure for the purpose of the discussion. The post goes to the principle.
Trevor retreats behind principle, after going on TV talking about his $45 a week figure. Shame on the media for running with it, without checking it out.
What are the mistakes Trevor made.
- The no depreciation on land is the big one. The median house value is $360,000. Looking through the WCC property database, I would estimate this averages out to $190,000 building and $170,000 land. So Trevor’s figures are already out by close to 100%
- The depreciation rate is 2% straight line or 3% diminishing value. For an exercise of this nature, SL is better in my opinion, so no problem there.
- The other massive mistake Trevor has made is overlooking that the depreciation has to be repaid when the house is sold. The gain to the landlord is not the tax rebate on the depreciation, but the interest free use of that money for some years. Now that can still add up to a useful amount (as I calculated here) but way way less than the tax rebate itself.
So taking 1 and 3 together, Trevor may be out by literally a magnitude.
Putting aside Trevor’s faulty maths, how great is it to see Labour championing the cause of landlords to claim non existent depreciation? If Labour has a strategist in their ranks, he or she must be in tears at Labour’s inability to run a coherent message.
UPDATE: If you thing I have been harsh on Trevor, read Keith Ng at Public Address:
Of course, this means Trevor Mallard’s own back-of-a-napkin adventures were even more full of shit.
As he acknowledges in his update, he included land values, so he massively overstates the cost, and he didn’t even consider clawback. The curious thing is how his clearly, completely and massively wrong estimate ended up being in the same ballpark as the Property Investors Federation’s completely unsubstantiated figure…
Oh. Right.
Full. Of. Shit.
I love it how Labour have become shrills for the Property Investors Federation.
Related posts:
- Fisking Trevor
- Trevor complains Hekia not ditching parliamentary duties for campaigning
- Do you want a Finance Minister who can’t do basic maths?
- Tax Working Group
March 12th, 2010 at 7:35 am
Mr Mallard was championing the artificial boost to house prices in the school grammar zone last month; now he is championing the rights of landlords to get a tax subsidy that skews investment in the economy. I suppose when his party is at 30% he needs to look for voters somewhere, but somehow I doubt they are going to come from middle and high income earners.
Mr Mallard seems to have lost the plot lately. Last night he flew to Auckland to attend two public meetings with Ann Tolley, and covertly videoed the proceedings on his i-phone.
Vote:March 12th, 2010 at 7:39 am
Or “the strategist” is a part of their problem. Their aim seems to be to Attack! Attack! Attack! but they don’t seem to have figured out that for that to work you need something credible to attack with. They are crying wolf packs.
Vote:March 12th, 2010 at 7:48 am
Really….! I seem to remember a time when his then leader was having a go at National about muckraking. This seems classic muckraking to me.
Vote:March 12th, 2010 at 8:10 am
How are landlords claiming the tax on the depreciation on the dwelling different for any company claiming depreciation on any of their fixed assets?
If a company owns a car or any plant machinery they claim depreciation, this is exactly the same
[DPF: The depreciation is a myth for residential property. The empirical evidence is that they appreciate, not depreciate]
Vote:March 12th, 2010 at 8:23 am
So if landlords can claim for depreciation of assets, then it follows they should be taxed for capital gain.
Strange how Liarbour has become the landlords party, backing those who have helped price ordinary kiwis out of the housing market!!!
Vote:March 12th, 2010 at 8:34 am
Labour, babbling incoherently since 2008.
Vote:March 12th, 2010 at 8:36 am
Labour…bad maths, contradictions, incoherent message? I’m just shocked…
Vote:March 12th, 2010 at 8:58 am
Maybe Trev should be the first to sit the new School Standards he might get a bad report, now wouldn’t that be funny.
Vote:March 12th, 2010 at 9:02 am
Fairfacts – that doesn’t necessarily follow – as DPF stated the monies gained by claiming depreciation have to be repaid if the house is sold for an amount exceeding it’s depreciation value – known as recovered depreciation.
When we had our rental house we ended up opting out of the house depreciation as it was just a hassle doing the paper work for little gain, however if you had a number of properties then the use of money issue could be significant (perhaps over 2-3 years a deposit on another house?)
Vote:March 12th, 2010 at 9:03 am
For the life of me I cannot see what affinity to, or knowledge of, Trev can have with any type of housing or landlord situations. His behavior surely makes him more of an expert on more mobile abodes and their parks.
Vote:March 12th, 2010 at 9:07 am
I don’t know how many times this has to be repeated…. When the house (and any other depreciable asset for that matter, including Bob Jones’ office blocks) is sold, the value of the asset at time of sale is compared to the book value, and any difference up to the amount of depreciation claimed has to be paid back.
Have you got it yet guys? This depreciation thing is not only a myth because houses generally appreciate (though not always as evidenced in the last couple of years) but it is a myth because at sale time depreciation claimed HAS. TO. BE. PAID. BACK
Vote:March 12th, 2010 at 9:34 am
I find nothing strange in Mallard or any other Labour Pollie championing the cause of residential landlords.
Labour pollies and rental housing (often of the slum type) have always had a connection.
Vote:March 12th, 2010 at 9:35 am
Labour have been well and tuly sucked in by the property investors federation to going into bat for them.
I made a comment over there explaining how rents will not rise, they may in the short term, but in the long term rents will stay flat to fall, and in real money, rents will fall – based on rents actually not being set by supply and demand, but by wages, and how much people can afford to pay.
This clearly wasn’t in tune with the theme that the duck is trying to promote to the great unwashed, so it never made it through the duck’s filter….. What a surprise.
The left, the last bastions of free speech.
Vote:March 12th, 2010 at 9:36 am
[DPF: The depreciation is a myth for residential property. The empirical evidence is that they appreciate, not depreciate]
David, your readers have supplied quite a number of arguments to the contrary. At least I would have expected your comments to be a little less categorical, recognising that even the temporary cashflow benefit (when that alone is applicable) does not advantage every investor.
You are fixed in your view in relation to residential property, it seems. Do you also favour abolition of depreciation rates on commercial properties?
Vote:March 12th, 2010 at 9:39 am
@Rouppe,
It looks like you will have to repeat it multiple times on Red Alert where there are bullshitting, scaremongering politicians who do nothing but practice hysteria politics.
Vote:March 12th, 2010 at 9:50 am
Depreciation rates on buildings are 3% SL or 4% DV. Been that for a long time.
Vote:March 12th, 2010 at 9:57 am
So this is the post he makes, withdraws, spend another day to get right, and is still miles out. Einstein he is not.
Thanks God hes not in charge of the countries finances.
Vote:March 12th, 2010 at 10:08 am
DPF:
Correct me if my memory is faulty, but wasn’t Mallard once Associate Finance Minister and widely tipped to be the Cullinator’s heir apparent? Bullet, dodging of…
Vote:March 12th, 2010 at 10:24 am
This “story” led TVNZ 1 “news” last night. The usual shite from that lot. Lots of breathless huffing and puffing from the stooges in the studio with a big red arrow pointing up behind them with “RENT”on it.
Then the live broadcast from some one out in the street…..LIVE at 6 talking about rent. Only now are we cautioned that this news item is actually a beat up and we’re told the other side of the story, presumably to establish the “balance” required in news items…….. rubbish.
Vote:March 12th, 2010 at 10:26 am
It amuses me Trevor as a senior member of Labour regularly refers to John Key as ‘smile and wave’ even as a title to his latest post. There were a lot of names round for the last PM but I cannot remember any senior national politicians using ‘speed and scowl’ or similar.
Vote:March 12th, 2010 at 11:27 am
>Trevor has made is overlooking that the depreciation has to be repaid when the house is sold
I’ve never actually done this so I might be wrong but if the house is owned by an LAQC and you just sell the shares in the LAQC then the house has not changed its legal owner so there is nothing to repay. Of course you’ll be selling the shares in the LAQC for more than you paid for them but that is a capital gain.
Vote:March 12th, 2010 at 12:18 pm
@Nigel
I presume you mean sell to someone unrelated, ie a genuine offloading of the house. Theoretically this is true. However it would only be really useful if an LAQC only ever owned one house and if the buyer was interested in buying a company and all the attendant paperwork that involves (annual returns, extra tax return a year etc).
My LAQC owns two houses. So to sell one of them I’d have to actually sell that house and thus be liable for depreciation clawback.
Why do I have an LAQC in the first place? Not to gain access to ‘tax loopholes’ (a myth) because you don’t need an LAQC for that. I’d get the same benefits and obligations by owning them directly. I have one because I originally lived in the houses. You can’t borrow a stack of money for the purposes of an owner occupied house and then suddenly decide it was for an investment and therefore the interest be available as an IRD deduction. They don’t like that. The test for loan interest to be eligible for deduction is that it be borrowed for the purpose of investing in a profit-making (and thus liable for tax) venture. So when I moved from house 1 to house 2, I created the LAQC and sold house 1 to it at market value, and the LAQC borrowed money to buy it. That money was now clearly eligible for interest deductibility. Similarly when I moved from house 2 to house 3 I sold house 2 to the LAQC for market value.
Again, my houses produce a profit and I pay tax. At the moment I am happy for all the net profits to go straight to the bottom line and pay the debt off faster and faster. In about 4 years they will be debt free and I’m not sure what I will do with the surplus as I’m still 18 years away from retirement age. But make no mistake, these are investments for my retirement, not vehicles to reduce my taxable income. I love paying tax, cause it means I’m making money.
Vote:March 12th, 2010 at 12:21 pm
Mallard cannot spell Invercargill either as Anne Tolley gleefully told the house.
Vote:March 12th, 2010 at 1:04 pm
The Duck is also wrong on another thing. He argues that because a property invester cannot claim depreciation rents will increase. This statement defies the laws of supply and demand. If landlord costs were the sole decider of rents, then the rental price would have decreased when interest rates decreased. They clearly have not. Rents are a product of what people are prepared to pay for them. Putting your rent up may be futile as potential renters will go elsewhere. Rents may go up, but they will never sharply increase to cover loss of depreciation. The reality, and arguably an aim of this exercise, will be that house prices will fall, which is not a bad thing for many of the Duck’s voters.
Vote:March 12th, 2010 at 4:42 pm
He lost me at “My calculation is”.
I’d accept Trevors calclations on anything based on what? His punchy skilz?
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