What would a Labour-style capital gains tax mean for the average person? And what would happen if prices went backwards?
Here are seven questions you might be asking about Labour's tax policy.
What's proposed?
Labour's proposal for a capital gains tax (CGT) focused simply on residential investment property is largely in line with a minority view of the 2018 Tax Working Group – which said it would be a pragmatic approach to raise revenue without adding additional costs.
It was revealed on Tuesday that Labour is planning to take the CGT policy into the next election, not its earlier wealth tax plans.
The revenue raised would be used to fund three free doctor visits a year for every New Zealander.
Family homes and farms would be exempt from the CGT.
Profits from selling some properties will be taxed to fund healthcare, Hipkins says. (Source: 1News)
The minority view of the report said it agreed there was a strong case for extending taxes to untaxed capital gains.
But it said the comprehensive capital gains tax as proposed in the group's wider final report would outweigh the benefits.
"In our view, a comprehensive approach would impose efficiency, compliance and administrative costs that would not be outweighed by the increased revenue, fairness perceptions, and possible integrity benefits of the broader approach. Instead, we support a more moderate approach of extending current rules taxing gains, to property categories, only to the extent that benefits clearly exceed costs."
Robyn Walker, tax partner at Deloitte, said Labour's proposal was a sensible middle ground that mirrored that view.
"I think it's a good compromise, I guess, and it means that hopefully we're not like in the weeds on the details of capital gains taxes for the next 12 months, which even as a tax person, I don't want to do that."
What will it mean for the average New Zealander?
Walker said it would mean people who owned residential property would need to know their value at the point the policy took effect.
Labour is planning to implement it from July 1, 2027.
They would then need to keep track of the costs they incurred on the property to offset any gains they made on the property's value.
They would then have to pay tax – Labour is proposing at a rate of 28% – on the difference between their purchase price and their eventual sale price, minus money spent on the property, when they sold.
"Do you feel happy if you own property? Possibly not," Walker said.
"But at the same time, you do need to have made a gain. So, assuming that this is only a tax on realisation, you have to have sold the property, you do actually have the cash in hand, you've made an actual gain, you've got the money to pay the tax.
"That's a lot better than, you know, a bunch of scenarios like, you know, a wealth tax of 'work out your wealth each year and pay 3% to the government regardless of whether you've got any cash to fund it'."
Don't we already tax property gains?
This is different from the current bright line test, which applies tax to the gains made on some rental properties.
The bright line test is time limited – Labour increased it to 10 years but the current Government pulled it back so people only need to have owned a property for at least two years to avoid being automatically captured.
The bright line test applies tax at the person's marginal tax rate, which can be up to 39% depending on their income and the level of gains made from the property.
Inland Revenue also has the ability to tax people where it can be proved that a property was bought with the intention of sale, no matter how long it is owned for. This is a more complex process.
What happens if a property makes a loss?
Walker said a lot of the detail would still need to be worked out but it could be possible for losses to be offset against other property gains, in the same way that operating losses are dealt with at present in rental property investments.
That means people would not get a tax refund if they made a loss but could use the loss to limit the amount of tax they paid on other properties that made a gain in future.
Is New Zealand an outlier?
New Zealand is often called an outlier because we do not have a capital gains tax.
Walker said it would be interesting to see whether this would be perceived as addressing the issue, if it came into force.
"Because we have many, many things in the Income Tax Act that tax things which are of a capital nature.
"And so the approach that New Zealand has taken is essentially to say, what are the things that we want to tax? And we'll have rules that tax those things. And this seems like it's going to be just an extension of that.
"So it's just a new rule that will sit in the property provisions, which basically says all of these properties are taxed. Whereas, the alternative approach is you can say is all capital is taxed, except we'll carve out this, this, this, this, and this. And then you're left with whatever you're taxing.
"There are two different ways to get to the same answer. I mean, we still won't have a tax on business gains, certain share gains, that sort of thing. So it won't be considered a comprehensive capital gains tax. But will it be enough to sort of remove the noise about whether or not we've got one or not? Difficult to say."
What would it mean for property values?
Kelvin Davidson, chief property economist at Cotality, said other countries taxed gains on residential property and it did not stop prices rising.
"We don't know the counterfactual. They may have risen faster if there hadn't been a capital gains tax in those countries, but, you know, it doesn't kill capital gains from an investment perspective. It reduces your return, but there will probably still be capital gains even with a CGT in place.
One tax expert called it ‘capital gains tax lite’ while a business leader says it won’t make much money. (Source: 1News)
"You would think, at the margins, it probably does slow down the rate of house price growth."
He said many of the factors that had driven rapid house price growth in New Zealand over the past 20 or 30 years were no longer evident.
"The long downwards trend in interest rates, a relatively restrictive land supply and a relatively favourable tax system... interest rates can't trend down anymore, really. They're already low. And if this Government, if they can make the changes stick through the political cycle, it feels like land supply won't be quite as restrained in future as it has been in the past. So that argues for a lower rate of house price growth
"It's always felt like the tax system in future might be less favourable for property than it has been in the past... if those truly are the really key factors that have driven up house prices historically then you look at those in future. You'd have to say, well, there probably will be a lower rate of house price growth in future than there has been in the past.
"And yes, they'd have to get into government and enact it and everything, but yeah, it does feel like we're taking another step along that path."
Can investors dodge it?
Davidson said the way to avoid paying the tax was not to sell a property.
"There can be a very long lag in between a government announcing a capital gains tax, putting it into policy and actually collecting revenue off it."
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