Capital gain tax will have modest results

A plan to raise cash from capital gains tax on investment property by Finance Minister Bill English is a damp squib. Photo/Mark Mitchell.

Last weekend the Government announced a number of property tax measures and processes to ensure property investors pay their fair share of tax.

This included the proposal of a "bright-line" test to tax any capital gain realised from residential property sold within two years of purchase. This would exclude property that is the sellers' main home.

The media focus has understandably been on Auckland; however this tax change is a nationwide one, so we'll check out the situation both Auckland and nationwide.

There is a definite difference in hold period between Auckland and the rest of the country. It's quite clear there are signs of speculation in the Auckland market. When breaking the hold period into yearly buckets we see Auckland peak at less than one year but for the rest of the country it's most likely properties are sold within seven or eight years.

Of the 86,000 sales last year, almost 10 per cent (8400) were held for less than two years. In Auckland the percentage is much higher -- almost 15 per cent of 31,000 sales.

Some of these properties will be the sellers' main home so not liable for the tax and we estimate this to account for around 60 per cent of sales.

So 40 per cent of 8400 sales nationwide give us a total of almost 3400 properties that would be up for the tax.

Capital gain for properties shifted in less than two years is $230 million, taxed at an average rate of 30 per cent is almost $70 million a year to the taxman.

But not all capital gain will be liable as cost paid for renovations need to be taken into account. For example, if you bought an investment property for $500,000 and spent $50,000 renovating it, then sold it a year later for $600,000 you'd only be liable for capital gains tax on the $50,000 profit.

Some people will already be obeying the current tax laws and will be included in this amount, so again this figure will be scaled down.

Nick Goodall is a senior research analyst at CoreLogic.