Labour’s capital gains tax

Here we go again. Both National and Labour governments of years past have pondered the introduction of a capital gains tax. It’s always turned out to be a voting stinker.

In the 1980s, the Labour government under David Lange worked up a blueprint for a comprehensive CGT. It was scrapped after Labour’s defeat at the 1990 election.

The National‑led government under John Key set up a tax working group to review the tax system in 2009. The working group’s report floated the possibility of a comprehensive CGT but noted “practical challenges.” Key ruled out introducing a CGT or land tax in response to the working group’s report.

And then in 2011, Labour leader Phil Goff announced a CGT as the centrepiece of his party’s tax policy for the election. He was tripped up over economic costings during a town hall debate with Key in Christchurch. It prompted Key’s catch cry: “Show me the money!” Labour subsequently lost the election.

Now we have Labour leader Chris Hipkins promising to introduce a 28% capital gains tax on residential and commercial property sales, excluding family homes and farms, with the policy taking effect from 1 July 2027 if they win the 2026 election. The revenue would fund three free GP visits annually for every New Zealander through a new “Medicard” scheme.

Theory Meets Practice

Labour’s proposed tax: if you own investment property, you’ll need to establish its value on 1 July 2027, track all expenses incurred on the property, then pay 28% tax on the difference between your purchase price (or the July 2027 value, whichever is later) and your eventual sale price, minus eligible expenses.

This is where things get tricky.

Labour hasn’t specified which expenses would be deductible under the CGT, including whether mortgage interest costs would qualify as deductions. For property investors who’ve weathered the removal and subsequent restoration of interest deductibility, this uncertainty is frustrating.

Can I deduct mortgage interest against capital gains? What about rates, insurance, and body corporate fees? Will renovation and maintenance costs be included? How do I prove these expenses years down the track?

Tax consultant Geof Nightingale believes the introduction of a CGT only strengthens the argument for Labour to maintain interest deductibility for residential property investors. But until Labour releases detailed policy, investors are left guessing.

Will It Impact House Prices?

Kiwibank chief economist Jarrod Kerr stated he’s “certainly not going to sit here and say this is the end of the world and house prices are going to fall another 20%. That’s not going to happen,” noting that Australia’s CGT experience showed “it didn’t do much at all.”

CoreLogic chief economist Kelvin Davidson warned that CGTs overseas have failed to put the brakes on house price growth, noting that investors might simply choose not to sell. You can’t tax gains that aren’t realised, and investors sitting on properties for decades won’t pay a cent until they sell.

The Australian experience is particularly instructive. They’ve had a CGT since 1985, yet their house prices have continued to surge. If you’re waiting for this policy to magically make Auckland affordable again, you’ll likely be disappointed.

Likely Investor Reactions

In the event Labour gains power at the next election, you could expect some investors to sell up before the tax comes into effect to avoid paying capital gains tax. But what about capital losses? Sure, they could be ring‑fenced to offset future capital gains, though if you never make future gains, those losses appear to be forfeited. Given that many investors are still underwater from the 2021–2023 market correction, this could create perverse incentives.

Family Home Not as Safe as You Think

Labour’s CGT uses the same “main home” definition as the bright-line test, which has two tests to determine whether your home qualifies for the exemption. You only need to fail one test to get caught by the tax.

• Area test: More than 50% of the property’s area (including the yard, gardens, and garage) must be used as the main home.
  • Time test: The owner must have lived in the property as their main home for more than 50% of the bright-line period.
  • Planning overseas work stints or extended travel? If you own a home but move away and rent elsewhere for more than four years continuously, your property can become classified as an investment property, even if it’s your only home. MFAT diplomats, expat workers, or even Kiwis spending a few years overseas could get stung if they’re not careful about timing.

The clock starts ticking on 1 July 2027, so time spent away from your home before that date won’t count. But before you start planning extended time away after 2027, think carefully about the four‑year rule.

Tax Bonanza?

Labour forecasts revenue would start at just $100 million in the first year (2027/28), rising to $385 million in the second year and $969 million in the third.

Tax experts have questioned whether the policy will be a significant revenue generator in the short to medium term. And they’re right to be sceptical. Kelvin Davidson noted “there can be a very long lag between a government announcing a capital gains tax, putting it into policy, and actually collecting revenue off it.”

Smart investors will simply hold their properties longer, renovate and sell less frequently, or shift investment into non‑property assets. Labour might find the golden goose isn’t laying as many eggs as they’ve forecast.

The Real Impact

CoreLogic’s Kelvin Davidson suggested the policy could be “a way of disincentivising property investment and incentivising investment in other things such as shares or KiwiSaver.”

Investor Nichole Lewis, quoted in MPAMAG, warned the policy “may urge existing investors to stop adding to rental stock, or simply move to assets where gains will not be taxed,” noting that “last time Labour made changes to investor tax rules, investors stopped buying.”

That won’t do much for rental supply long term. Fewer investors buying property means less rental stock being added to the market. The unintended consequence could be higher rents as supply tightens – precisely the opposite of Labour’s stated goal of improving housing affordability.

Tax Exclusions

What won’t be taxed under Labour’s proposal:

• Your family home (subject to the main home tests)
  • Farms and agricultural land
  • Shares and other financial assets
  • Business assets (except commercial property)

This narrow approach has drawn criticism from tax experts who note it’s neither fair nor efficient and could distort investment decisions, since other assets like shares remain exempt. Professor Lisa Marriott from Victoria University noted that many high‑wealth household asset categories are outside the scope of the proposed CGT, including financial assets which are “more concentrated in upper net‑worth deciles” than property.

Wealthy Kiwis with diversified investment portfolios might shift from property to shares and escape the tax entirely, while everyday landlords saving for retirement through property get caught in the crosshairs.

Labour Needs to Win First

Labour needs to win the election first, and the election is still a year away.

RNZ’s polling from October showed 43% support for a CGT on investment properties, with 36% against and 22% undecided – hardly a mandate.

If you’re seriously considering selling investment property in 2026–2027, get professional tax advice now. The interplay between the current bright‑line test, potential CGT rules, and your personal tax situation is complex enough to warrant expert guidance.

If you’re a residential landlord or thinking of becoming one, Labour’s CGT proposal shouldn’t fundamentally change your investment thesis right now. Property investment has always been a long‑term game, and this is just another variable to consider alongside interest rates, tenant laws, and market cycles.

Watch For:

• Whether Labour releases detailed expense deductibility rules
  • How the polls track over the next year
  • Whether other parties adopt similar or alternative tax policies
  • What happens to rental yields and capital growth in 2026

The way to avoid paying capital gains tax is simply not to sell. For long‑term investors focused on cashflow and wealth creation over decades, a CGT might barely touch you.

Whether Labour’s CGT becomes reality or not, the fundamentals of successful property investment remain the same: buy well, manage professionally, maintain high‑quality tenancies, and focus on long‑term returns. Call 0800 GOODWINS for a chat.