Housing changes kick in from this weekend as Government unveils major policy

Investors going to this weekends open homes will have to reckon with the fact that any gains made from selling their property in the next 10 years will be hit by an effective capital gains tax.
For many investors, that tax rate could be about 33 per cent or 39 per cent of the sale, depending on their income and how much the house is sold for.

Those changes will be put into legislation currently before Parliament, and come into force from 27 March 2021 this Saturday.

Previous changes to the bright line test have taken effect some time after being proposed. Any investment property with a settlement date after Saturday will be hit by the new rules.

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Another big change for investors is the full removal of interest deductibility from investment properties. This means investors cant offset the cost of the interest they pay on their mortgage against their tax bill.

Those changes will also apply on any investment property bought from Friday. The Government will extend the rules on 1 October to all investment properties, regardless of when they were bought, although the Government may exempt new builds. It will phase out deductibility for those homes over the next four years.

Finance Minister Grant Robertson said the changes were about tilting the balance of the property market away from investors

Dominico Zapata/Stuff
The CoreLogic house price index for February found the average Hamilton home now costs $712,717, up 14.5 per cent on the year earlier .

Extending Nationals bright-line test and removing interest deduction loopholes for investors will dampen speculative demand and tilt the balance towards first home buyers,

The New Zealand housing market has become the least affordable in the OECD. Taking action is in everyones interests as continuing to allow unsustainable house price growth could lead to a negative hit to the whole economy, Robertson said.

The bright line test taxes money made from a property transaction and the sellers income tax rate. This means that an investor who earns $100,000 in income and makes $200,000 on the sale of an investment property will pay 33 per cent tax on the first $79,999 made from the sale, and 39 per cent tax on the remaining $120,001.

This is because the income tax rates are set at 33 per cent for income earned over $70,000 and 39 per cent for income earned over $180,000.

A lot of people fit into those tax brackets. Treasury and IRD estimate that 21per cent of taxpayers, more than 790,000 people, earn more than $70,000.

Ironically, this could be a more aggressive capital gains tax than the ones former Labour leader Phil Goff and David Cunliffe took to the 2011 and 2014 elections which were set at a flat rate of 15 per cent.

However, those taxes applied to all investment properties, rather than just those sold within 10 years of being bought.


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