Property investment advocates say the proposed capital gains tax will see investors sell-up, reducing the supply and unltimately leading to overcrowding.
But the trade unions have welcomed it as a chance to stop speculators and help people onto the property ladder.
The Tax Working Group today released its recommendation for a CGT to be applied on assets such as land, shares, investment properties, business assets and intellectual property.
Any gains on the sale of these assets would be added to the seller's overall yearly income and be taxed normally at realisation – meaning a CGT would only take effect when it becomes law.
Other assets – such as the family home, cars, boats and art – would be exempt from a CGT.
Andrew King, chief executive of the New Zealand Property Investors Federation, said the recommendations weren't a surprise.
"They were set up to bring in a capital gains tax that wouldn't affect the family home."
But he said the proposals would penalise those who saved and invested and encourage people to either spend their money or put it into the family home.
"Basically it's a disincentive to those who want to save money and invest money - they get punished."
King expected the proposed changes, which still require government sign-off, could push up family house prices as people upgraded their home rather than investing in property and drive more people to sell their investment properties resulting in fewer available pushing up rents.
"I can only see that rent is going to go up and that is bad news for tenants."
He said that drove people to move in together resulting in crowding.
"Rents are going to be more expensive. Overcrowding is going to increase."
King said property investors were already selling up because it was getting harder to be a landlord and because of concerns about government plans to ringfence losses.
"There are lots of things causing people to leave."
He said there probably wouldn't be a drop in the number of rental properties but new supply was not coming into the market to meet growing demand.
"It won't be there. There will be a shortage of rental property, higher rents and overcrowding.
But Richard Wagstaff, president of the Council of Trade Unions, said taxing the income from capital gains was an important piece in the puzzle making New Zealand a fairer place.
"Those who complain about taxing this income like all other income, are those who are currently able to play the property market as if it were a game of monopoly."
Wagstaff said so many working Kiwis were struggling to buy a single home because of the way that the wealthy few could use this subsidy to speculate.
"With wages receiving a falling share of the nation's income it is increasingly important that taxation of income from capital is made fairer,"
"Working Kiwis deserve a better deal and now the government needs to show what they are made of and show that they truly do care about making ours a fairer system."
OneRoof editor Owen Vaughan said if the government decided to adopt the proposals New Zealand could see some investors quickly withdraw from the market.
"In the short term this could put pressure on the rental market, which the group acknowledges in its report.
"The group concludes that market pressures will constrain attempts to push rents above what landlords are already able to set, and that tenants will find home-ownership more affordable than renting as a result of a lowering of house prices.
"That's the experience in other countries with similar forms of capital gains tax, but recent polls suggest that the Government will have job convincing Kiwis that the changes are nothing to fear, especially in the shadow of falling house prices in Australia, even though the triggers of the chaos there are nothing to do with capital gains tax."