The Government’s changes to the bright-line test could potentially save close to 60,000 properties on average between $55,000 and $65,000 each in tax.
Research from OneRoof’s data partner, Valocity, looked at the number of properties that would benefit from the reduction of the the bright-line period from 10 years to two years.
A total of 130,726 second homes bought between the start of 2019 and the end of 2023 could be affected by the current 10-year test if sold today. Of those, potentially 58,000 properties would benefit from the rule change, which takes effect from July 1 this year.
Under the bright-line test, sellers are required to pay income tax on any profits they make from the sale of residential properties that don’t quality as their main home.
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The test was introduced by National in October 2015 to curb property speculation. It initially affected properties sold within two years, but in March 2018 the Labour Government extended the bright-line period to five years, and then extended it further to 10 years in March 2021 in an effort to take the heat out of the housing market and level the playing field for first-home buyers.
Last year, National came to power promising to revert the bright-line period to two years as part of its push to bring "meaningful income tax reduction".
In her mini-Budget delivered in December last year, Finance Minister Nicola Willis said: “Removing this effective capital gains tax means that properties sold after 1 July 2024 will only be subject to the rule if owned for less than two years."
She also confirmed the Government’s commitment to fully restoring interest deductibility for rental properties.
The Valocity research found that more than 98% of the second home purchases made in 2019 and 2020 had gained in value, and would be liable for tax under the current bright-line rule.
However, the post-Covid property boom and subsequent slump in prices have put the squeeze on the value second home purchases made from 2022 onwards. Just 31,000 have gained in value, and would be hit with income tax if sold today.
Valocity senior research analyst Wayne Shum said the average nationwide gain for second homes bought since 2019 was $166,707. “The region with highest average gain, at $210,695, was Otago, driven by strong value growth in Queenstown-Lakes, while the lowest average gain was in Nelson, at $102,294. Auckland's average gain was $175,170, although the region was where the bulk of secondary property purchases were made.”
Shum said the reduction of the bright-line test to two years would mean that around 58,000 properties would not be liable for income tax.
“Properties that would have previously been caught under the bright-line rule could save on average $65,016 in tax, assuming they rose in value and income tax was at the top rate of 39%.”
Valocity senior research analyst Wayne Shum said the bulk of second home purchases were made in Auckland. Photo / Fiona Goodall
LJ Hooker agent Dylan Turner, who sells in South Auckland, said the 10-year bright-line rule and the removal of interest rate deductibility had hit many mum and dad property investors hard, noting that they were unable to cover their costs from rents, and unable to sell without incurring a large tax bill.
“We definitely had a lot of owners that have considered selling but have been hamstrung with that bright-line situation,” he said.
Turner said smart investors were already listing their properties ahead of the July rule change. “They understand that it is probably going to take a couple of months to sell,” he said.
Anthony Appleton-Tattersall, director of AAT Accounting Services, said the extension of the bright-line rule to 10 years had penalised homeowners who should not have had to pay tax on their sales.
He said that until the legislation concerning bright-line and interest rate deductibility was tabled and passed, investors couldn’t be absolutely sure what the changes would be. “While the proposed reduction to two years is good, we don’t have the draft legislation yet,” he said.
“There will be a tax bill that comes up in the next couple of months called something like the Taxation Remedial Matters Bill 2024. In that they will do a whole bunch of little tax changes and some of them might even be surprises.”
Finance Minister Nicola Willis in December last year. The details of her bright-line overhaul have yet to be announced. Photo / Mark Mitchell
The Government’s coalition partners will have some say. ACT’s policy at the election was to repeal bright-line in its entirety. New Zealand First opposes any capital gains tax, but in a media release last year said: “Bringing down the bright-line test to just two years means the housing market will spiral out of control - with empty properties being flipped for massive profits.”
Appleton-Tattersall said he expects the exclusion for owner-occupied properties to remain and continue to be proportional for homes that have been both owner-occupied and tenanted during the bright-line period. That means if an owner-occupier lets the home to tenants or leaves it vacant for a period, the bright-line tax will be proportionate according to the period of time the owner lived in it.
Other exclusions to the rules, which may or may not survive include land inherited from family, relationship property splits, and in some cases transfers to family trusts.
Appleton-Tattersall said investors who bought at the top of the market in 2021 were unlikely to be hit by the bright-line rule because they can only be taxed on capital gain. “Most properties bought at the peak have gone down in value so wouldn’t be affected by the bright-line tax,” he said.
The clients most affected were those who wanted to restructure their property holdings and move the ownership of the property to a company or trust. “So it’s got very little to do with actually selling on the open market because most property investors want to hold their properties for a long time,” he said.
“I would say fewer than 5% of my clients are looking at selling any of their properties, and those that are, are still looking at keeping some and selling one or two.” Some might change their minds if interest deductibility is reinstated, he said.
Others had just made their mind up to sell. “The general anti-landlord sentiment of the last few years has been a major issue. I’ve got some clients who don’t tell their families that they have rentals because they don’t want to be seen as a property investor.”
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