Do you own or are looking to own residential real estate in New Zealand? Learn more about new tax on real estate

Speculation Tax – New Zealand New Tax on Real Estate

If you own or looking to own residential real estate, you should know about speculation tax. You should also be aware of the Government tax policy to address New Zealand housing affordability.

Do you have a second home or holiday home in New Zealand?

Starting from the next year negative gearing of rental income which ends into a tax refund is being abolished. The general theory behind this move is to overcome the public perception that rental investment properties are being subsidised by the tax policies. So far comprehensive capital gain tax is off the table, but the 5 years tax rule has been brought in. It means if you buy a residential rental property and sell within 5 years you must pay income tax on the profit.

What we know: Bright line tax

Speculation tax (Bright Line) is effective from 01-04-2018, it applies to all residential investment properties within New Zealand and overseas.

• A transfer of property to you in the event of relationship break-up is not excluded from this tax. You don’t need to pay tax when this gets transferred to you, however, when you sell this property within five years of its original purchase date, the tax applies.
• If you sell property at a loss, then you can only use the loss from the income you earn from future property sale. It means property loss can only be offset against property income. For example, this cannot be offset against salary, wage or rental income.
• New Zealand tax residents pay tax on their worldwide income under New Zealand tax laws.
• It applies on a worldwide income if you are selling a property in another country, you may need to pay tax here.
• If you are offshore seller, the Residential Land Withholding Tax may be deducted from the sale price.
• Generally, the bright-line period start date is on the date it is registered with the Land Information New Zealand (LINZ). And the end date is on the date the sale and purchase agreement get signed.

You’re exempt if:

• The property is your primary residence;
• You inherited the property
• You're the executor or administrator of a deceased estate.

Tax Rate:

• Individuals – depends on the individual’s yearly income. If income over $70,000 at 33%
• Companies – 28%
• Trust – trustee tax 33%
• Offshore person- offshore person will pay Residential Land Withholding Tax (RLWT). There are three types of calculation to be done. The lesser of three options would be a tax amount. For example, sale price is $600,000 and purchase price is $500,000. Local body rates overdue $2000, and mortgage $250,000
  1. 10% of sale price = 600,000 x 10% = $60,000
  2. Sale price less purchase price x RLWT rate = $100,000 x 33% = $33,000 (if company 28% tax)
  3. Sale price less mortgage less local body rates. $348,000
  So, the tax amount would be $33,000. Generally, option 2 will be widely used. This cannot be less than zero.

What we don’t know yet

• The main idea of implementing these rules is to make housing cheaper. How much effect his would have on housing affordability is unknown. The capital gain tax was introduced in Australia, but this had no effect on housing affordability and lower rents.
• Bulk of New Zealand houses are mix houses they can be either be owner occupied or rental. We do know have specific rental stock like other countries such as apartments in Gold Coast or condos in Canada. The scalability of economy is small.
• It is also unknow who sets the final price of the house. Is this landlord or owner occupier? If this is owner occupier, then this will have no effect on house prices as they are exempt from these rules.
• The government has started collecting the information on properties in terms of who owns the real estate (beneficial not just legal) that will also help the Inland Revenue Department, and other law enforcement agencies. Currently, only the legal owner and transfers of legal title are registered at the Land Information New Zealand.

IBBZ Accounting is here to help

We can help you assess how these new residential real estate taxes affect you or your company – whether you own a second home, holiday home or investment or development property. Please contact our tax specialist team.

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