While most people are familiar with taxes such as GST, PAYE, and vehicle registration levies, Capital Gains Tax (CGT) is a relatively new to New Zealand. That said, it soon could pose a larger challenge for those thinking about property investing in New Zealand.
Capital Gains is the profit you make from the increase in value of your assets between the time you buy and the time you sell. CGT is applied in some developed countries to sales of stocks, bonds, precious metals, and of course, property.
With capital gains tax it’s important to know the ins and outs so you can be sure you know exactly what you have to pay and how much of your profit you can claim back as a taxable income.
When the 2015 National Budget was released, despite an election promise not to introduce any new taxes, the government implemented the ‘Bright-Line Rule,’ which aims to discover a person’s intentions for selling property. Is it to help them into a new home or is it to make a profit for the next investment? Effectively it’s a Capital Gains Tax on property in disguise, despite government insisting it’s not. The ‘Bright-Line Rule’ came into effect on October 1st 2015 and encompasses all residential property that is bought and sold within a two year period.
Fortunately, there are some exemptions to this tax, which may save you from having to pay it. For example, if the property is your primary residence, is inherited, is acquired as part of a relationship property agreement, is farmland or commercial property, you will not have to pay this new version of Capital Gains Tax. However, if you have more than one property that you use regularly, like a holiday home, The Bright-Line Rule will apply and you will probably have to pay tax when you sell it.
The government’s primary intention for introducing the Bright-Line Rule is to keep track of overseas buyers and sellers and the amount of tax they pay, as well as dampen speculation within the Auckland housing market in a bid to lower property prices.
Read more: The role of median rental rates when buying an investment property
As a rule of thumb with real estate, unless you are in one of situations previously outlined, you should expect to to pay Capital Gains Tax. This includes properties that you’ve lived in for a long time but have also rented out as an investment. For example, if you live in a house for 10 years, rent it out while you move overseas for 4 years, then come back and sell it. In circumstances like this, you may be required to pay Capital Gains Tax for the period where you weren’t the occupant of the house.
How much Capital Gains Tax you have to pay depends on how long you have lived in the property and it’s then charged at your marginal tax rate. The Bright-Line Rule comes into effect when you sell a residential property that isn’t covered by an exemption and if you are selling the property within two years of purchase. Under such circumstances, you will have to pay tax on the difference between the sale price and purchase price. The gain from the property is then added to your tax return in the year it is sold. Therefore you can pay your tax at the normal income rate.
Capital Gains Tax on property and the Bright-Line Rule can be confusing subjects to get your head around, especially when trying to figure out when and under what circumstances the rules apply. If you would like further clarification on this before selling any property, consult a qualified tax professional for specialist advice and peace of mind.
Download our A-Z guide is a handy guide to help you navigate the property investment world, and make buying, leasing, and selling homes that much easier:
