In strong property markets, thoughts of capital gain on property investment naturally surface. In this rising market, a common question is: “When should we sell?”
Capital gains is an even hotter topic now as the Government’s Tax Working Group appears set to recommend, except for the primary family home, a broader tax on property capital gains.
In times gone by, particularly in the years 2000-07, many amateurs turned to home improvement as a way of making money from property. They bought housing stock in need of renovation, replaced kitchens and bathrooms, painted and re-carpeted and sold at a tidy profit. The practice was mirrored, and encouraged, by a plethora of home improvement shows. It’s not a surprise that during the booming property markets of the past five or so years, this type of show has morphed into the TV fare we face today.
The tax laws of a decade or so ago were not that different from today. Profits were taxable if the intention was to buy and sell property that was not the primary family home and purchase and sale occurred within a relatively short timeframe.
In recent years, that tax law has been made more explicit under what we have come to know as the bright-line test. The test at first taxed profits on non-primary home sales made within two years of purchase. The two-year test applied to property bought on or after 1st October 2015. The current Government has extended the bright-line test from two to five years. So any investment property bought after 29th March this year will be subject to capital gains tax if sold at a profit within five years. It’s worth bearing this in mind with investment properties already held and when contemplating future buys. http://taxpolicy.ird.govt.nz/publications/2018-sr-bright-line-test-five-years/special-report
My long-held view is that investment property should always be bought with the intention of holding long term. It is a very rough rule of thumb that residential property doubles in value around every 10 years (on average). When you consider that an average brick three-bedroom bungalow could be bought in Dunedin in the early 2000s for $80,000 to $100,000, that rule of thumb has been borne out. The median sale price in Dunedin now is over $400,000. So in 18 years, house prices, on average, have doubled and doubled again.
As with buying shares, property investment is all a matter of timing. Astute stock market investors will tell you they try to buy when the market is low and they sell when it is high. They buy when others are selling and they sell when everyone else seems to be buying. In short, they do the opposite to the crowd. To make gains from property investment, the strategy is not that different. The introduction of a wider capital gains tax, however, could well change the investment landscape for a large section of New Zealand’s property owners.