In the wake of Prime Minister John Key’s suggestion that a land tax could be on the cards, the spotlight has fallen on demand-side measures to curb the housing market.
These include a land tax, stamp duty, restrictions on foreign buyers – and a capital gains tax.
Popular opinion has it that such measures would dampen all demand, apart from that of first home buyers, and put a halt to property investing and trading practices.
For example, in recent days, flipping – ie: buying and then quickly reselling a house for a large profit – has been highlighted as a practice that would be impeded by the introduction of a capital gains tax.
However, industry experts have said this theory ignores the realities of the current tax system for property owners and traders.
Auckland Property Investors Association president Andrew Bruce said that, contrary to popular opinion, taxes are already levied on those selling property for gain.
He pointed to the government’s new bright line test as an example.
The bright line test, which was introduced last year, means that anyone selling a property, other than the family home or an inherited property, less than two years after buying it, will be taxed on any profit.
“But it doesn’t matter whether someone holds a property for two years and a week or more, it is all about the ‘intent to sell’ test,” Bruce said.
Many people don’t understand the nature of property trading because of TV programmes like “The Block” and “Our First Home”, he added.
“Such programmes don’t present an accurate picture. Firstly, the gains made are clearly taxable – because the intent is always to sell.
“Secondly, they don’t take into account the GST, personal taxes, and holding costs involved with adding value to sell. Nor do they consider the financial risks.”
Presentations of property trading are often incorrect, mortgage broker Kris Pedersen agreed.
He said most people flipping properties do it correctly and pay tax – usually after adding value to a property.
“There will probably always be the odd person who sifts through the net.
“But most of the people who say they plan to try and get away with not paying tax on a property, or properties, bought to sell for profit, don’t usually end up doing it.
“It turns out to be much harder than they thought it would be.”
In Pedersen’s view, the vast majority of people escaping taxes on property profit would be families trading up on their family homes.
“The only way to stop that would be to bring in a capital gains tax across the board – and that’s not a popular option with most politicians or people generally.”
Most political parties have ruled out the introduction of a universal capital gains tax. That includes the Labour Party which dropped its capital gains tax policy last year.
Earlier this week, Key again rejected the idea of a capital gains tax to media.
He also said a land tax was not imminent, rather it was something the government was “keeping in its toolbox”.
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