But there is a caveat for properties purchased at the peak of the market that could make the purchase price relevant in calculating a property’s tax bill.
It relates to those whose property has dropped in value but then climbs again slightly before sale.
Say someone bought a second house at the peak of the market for $1 million, which has dropped to $800,000 by the July 2027 valuation day, but then inches up to eventually sell for $850,000.
In real terms, the owner would have lost $150,000, but would they be taxed on the $50,000 increase between valuation day and sale?
Despite not having a clear answer in its policy document or website, the Labour Party has clarified that a property owner in this situation would not be taxed on the $50,000 increase between valuation day and sale.
A party spokeswoman said in order to calculate the amount of CGT owed, Labour would use a “median rule”, as recommended by the Tax Working Group report.
“This makes sure a valuation on one particular day doesn’t create an artificial gain or loss – you pay tax on the gain you actually make,” the spokeswoman said.
The Tax Working Group recommends a median rule as a way to avoid taxing artificial gains.
To calculate the taxable amount, officials would take the median, or middle number, of the purchase price, valuation day price, and sale price and subtract that from the sale price, to calculate the taxable amount.
This means the purchase price can be used to ensure owners are not taxed on gains they did not make overall.
How many people could the median rule impact?
House prices peaked in late 2021 but have since dropped by about 15% in nominal terms and roughly 30% lower after inflation.
The median rule is expected to impact about 19,500 residential properties, according to property firm Cotality. Photo / Mark Mitchell
Nick Goodall, head of research for property intelligence firm Cotality, estimates that three-quarters of residential property investors who purchased during the peak would be impacted by Labour’s median rule if the tax were to be implemented.
It equates to about 19,500 residential properties from a total of 26,000, Goodall’s estimates suggest, noting the tax excludes the family home.
“This is likely one of the factors that has led to Labour projecting a relatively small amount of revenue to be gained from the proposed CGT in the first year, ramping up after that,” he said.
The party is modelling $100m in revenue from the tax in its first year, climbing to more than $1.3 billion after 2030.
Goodall said investors will likely delay selling their property due to the new tax, predicting about 18,000 residential sales in the first year of the tax being implemented, down on a normal year of 30,000-35,000.
Cotality estimates that about 29,000 first-home buyers entered the market during the 18-month peak period, with about 3600 thought to be in negative equity, meaning they owe more on their property than what it is now worth.
Ethan Manera is a Wellington-based journalist covering Wellington issues, local politics and business in the capital. He can be emailed at ethan.manera@nzme.co.nz.