In reality, it’s not quite so simple and some people who only own one home will have to pay CGT on capital gains made by their property.
So how does it work?
Announcing the policy last Tuesday, Labour said the definition of family home it would use for its CGT is the same one used by the bright-line test, which is a capital gains tax that applies to investment properties bought and sold within two years.
This exemption is mostly the same as the definition used by the John Key Government when it introduced the bright-line test a decade ago (Labour changed the definition in 2021 when it extended the test to 10 years, but the coalition changed the rule back).
This rule (called a “main home” rather than a “family home” exemption) has two ways of testing whether a home is a main home or not. You only need to fail one of the tests for your home to be caught by the tax, requiring you to pay tax of 28% of any gain made after July 1, 2027 (under Labour’s proposed rules) in tax.
50% rules
The first is that at least 50% of the home’s area must be used as that person’s home.
This means that if you own a home that has a small flat that you live in and a larger area that you rent out, you would be caught by the tax. It could catch a retiree who moves out of the main part of their home and moves into a smaller downstairs flat.
The second 50% rule could catch more people out.
This rule says that in order to claim the main home exemption, you need to have lived in your home for half of the time since you bought it.
If you’ve been out of the home for just a day longer than that, then under the current rules – the ones Labour plans to adopt, then you could get taxed, even if you are actually back living in the home at the time you sell it.
It may be your “main home” then, but in the view of current tax law, it hasn’t been your main home long enough to get the exemption.
Four year rule
There is one very important exemption, which was not mentioned in last week’s press conference, but which Labour says it will adopt.
This is known as the “four year rule” and it was a recommendation of the 2018-2019 Michael Cullen Tax Working Group.
The rule means that if there is a “temporary change of use as a result of a person moving for work purposes, or going overseas for a short period, the change of use will be ignored for four years”.
In other words, if you own a home in Wellington for a year or two, but get a job in Auckland, where you rent, you have four years to sell your Wellington home before your property becomes an investment property and you may have to pay tax on any gains when it comes time to sell it.
You would be an investor, even if you only ever own that one home and later return to live for a year.
Though not stated in the document, the rule is likely to reset for successive life events. In plain English, that means, if you are an MFAT diplomat, you can go on a three-year posting, return, and then go on another three-year posting, without being caught by the rules and becoming an investor.
If, however, you do back-to-back postings and spend six years out of your main home, you’d get caught.
The clock starts ticking on these rules on July 1, 2027, meaning time spent living away from your main home before this date doesn’t count when calculating whether you are or are not an investor.
The number of people who only own one home which isn’t, for tax purposes, a “main home”, is probably very small, but it may be larger at the moment than in the past because the property market crash incentivises people to rent homes they can no longer live in, instead of selling them.
And while it may not hit many people, the people who do get hit could be hit very hard. If they sell their home and go to buy another one, they will be at a disadvantage relative to other homebuyers who are not paying 28% tax on the sale of their previous home.
Stats NZ data shows that only one in 10 people own investment or commercial property, a figure that includes people who own one “investment” property but no other property, and therefore rent their “main home”.
These people will, in almost all circumstances, need to pay the new tax. However, this figure just captures a single point in time and doesn’t reflect the number of people who may have lived out of their main home in the past, or may move out of their main home in future, and therefore be captured by the tax.
People moving for work in the past may have sold their home and bought a new one. Now, however, incentives favour holding onto a home and renting until the market recovers.