What could Capital Gains Tax mean for property investors?

If Capital Gains Tax (CGT) is introduced from 1 July 2027 under Labour’s proposal, property investors will naturally want to understand what it could mean for them, particularly if they already own property that has increased significantly in value.

One of the important features of the current proposal is how existing properties would be treated. Rather than taxing the entire increase in value since a property was originally purchased, the starting point for calculating a future capital gain would be based on the property’s value when the new rules take effect.

So, what could that look like in practice?

A simple property example

Let’s assume a property was purchased in 2015 for $400,000.

By September 2026, it is worth $600,000, and a registered valuation obtained as at 1 July 2027 values the property at $620,000.

Under the current proposal, it is this $620,000 valuation that becomes important when considering whether there is a taxable capital gain in the future.

What if the property is sold in 2028?

Assume the property market increases by around 3% and the property is sold on 31 March 2028 for $640,000.

There are also likely to be costs associated with selling the property. If we allow $20,000 for costs such as real estate commission, the net sale price would be $620,000.

That is the same as the property’s valuation on 1 July 2027.

As there has been no gain above the $620,000 valuation, no CGT would be payable.

What if the property is sold a year later?

Now let’s assume the property market increases by another 3% and the property is instead sold on 31 March 2029 for $660,000.

Again, allowing $20,000 for selling costs would result in a net sale price of $640,000.

This time, the net sale price is $20,000 higher than the property’s $620,000 valuation as at 1 July 2027.

Under Labour’s current proposal, that $20,000 gain would be taxed at 28%, resulting in CGT of $5,600. This would most likely be due on 7 April 2030.

Why the 2027 valuation could matter

Using the same example, let’s say the property investor obtains a favourable registered valuation of $640,000 as at 1 July 2027 instead of $620,000.

If the property is subsequently sold for a net $640,000, there has been no gain above the 2027 valuation. As a result, no CGT would be payable.

This highlights why the valuation of an existing property at the time the proposed rules take effect could be important.

Property investors may want to start thinking ahead about obtaining a registered valuation around July 2027 and ensuring the valuation appropriately reflects the property and any features that contribute to its value. A higher valuation at the starting point could reduce the amount of CGT payable on a future sale.

What does this mean for property investors?

For existing property owners, the introduction of CGT would not necessarily mean a large tax bill as soon as the rules take effect.

Using the examples above, if the property market increases by around 3% per year over the next two years, there could be little or no CGT payable because only gains above the property’s 1 July 2027 valuation would be relevant under the current proposal.

The key will be understanding the final rules, establishing an appropriate starting valuation and keeping good records of costs that may affect the calculation of any future capital gain.

There is still plenty of detail to come before property owners will know exactly how the proposed rules would apply to their individual circumstances. For now, there is no need to panic, but it is worth understanding the proposal and being prepared if it progresses.

Frequently Asked Questions

Q. What happens if you renovate or improve your property?

A. We won’t have definite answers until the legislation is available. However, based on current property tax provisions in New Zealand, any capital improvements or renovation costs would reduce the capital profit and, therefore, reduce the CGT payable.

Q. Would interest costs reduce the capital gain and, therefore, the CGT payable?

A1. Rental properties would normally receive rental income, with interest and other expenses deducted from that income to establish the rental profit or loss. Therefore, for rental properties, interest is already being deducted.

A2. We are unsure whether, if interest limitation rules were reintroduced, any non-deductible interest could be used to offset capital gains.

A3. For baches, it is unlikely that interest, rates or insurance costs would be allowed to reduce capital profits.

Q. Is a personal home excluded from the proposed CGT?

A. Under the current proposal, a personal home is excluded.

The issue is that personal homes could become one of the biggest areas for potential loopholes, and the exact rules around the personal home exemption are likely to change a number of times during the early years of any Capital Gains Tax.

For example, if you live in a personal home for six years and then rent it out for six months, would the gain be taxable? Alternatively, if that situation were reversed and you lived in the home for six months and then rented it out for six years, would the gain be taxable?

There are many possible scenarios, as well as opportunities for outcomes to be influenced depending on how the final rules are structured.

Q. Is the proposed CGT adjusted for inflation?

A. This is one of the largest arguments against a Capital Gains Tax at 28%. Under the current proposal, CGT would not be adjusted for inflation, meaning a significant portion of future gains could simply reflect inflation rather than an increase in real value.

Article by Ross Barnett

Disclaimer

This article is for general information only and is not intended as accounting, tax, or financial advice. You should seek advice from a qualified professional before acting on any information provided.

Any examples or figures are for illustration purposes only and should not be relied on for decision-making.