Capital gain tax on property vs other investments.

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Forums › Finance and wealth management › Capital gain tax on property vs other investments.

rayonline

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#152248 21-Sep-2014 17:52

Please educate me as I might not have this right.

My folks have a property that they rent out, obviously they pay tax on rental income when they get old and they sell it there is no tax right I mean they had that property for 10+ years -it's not that they are doing regularly which I think even at the moment if there is no offcial CGT they should still be taxed as it's their intention. If I be independent, I have a day job, I pay tax on that, I have savings, shares, Kiwisaver and I pay taxes on them too like dividend returns etc and should I sell my shares. So how is that different to propety investment? Sure you have rates etc .. but that's just the running cost of a property such is regular maintenance like plumbing and cleaning as required - the nature of properties. If they take out a mortgage and with that they might pay tax - not sure myself as I haven't got my own mortgage yet - still single. They get a mortgage to access more funds - so that's their business decision. If a shop owner wanted to start small or investment more for future gains - that's that right ...

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Biddle Corp

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#1133194 21-Sep-2014 18:05

It's no different. IMHO we should have a CGT, not because it will control property price (because it can't, and hasn't anywhere else in the world), but because it simply introduces fairness into the tax system.

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nakedmolerat

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#1133197 21-Sep-2014 18:13

sbiddle: It's no different. IMHO we should have a CGT, not because it will control property price (because it can't, and hasn't anywhere else in the world), but because it simply introduces fairness into the tax system.

I agree with this 100%

I have no problem paying tax.

Aredwood

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#1133199 21-Sep-2014 18:25

The law currently is that you must pay tax on capital gains if you bought the property with the intent of reselling it for a profit. And that tax is charged at your marginal tax rate. So anyone who claims that there is no capital gains tax in NZ currently is talking rubbish.

OP - what was your parents intention? Make money from rent, make money from increase in value [capital gain], Both, or something else?

rayonline

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#1133200 21-Sep-2014 18:29

Aredwood: The law currently is that you must pay tax on capital gains if you bought the property with the intent of reselling it for a profit. And that tax is charged at your marginal tax rate. So anyone who claims that there is no capital gains tax in NZ currently is talking rubbish.

OP - what was your parents intention? Make money from rent, make money from increase in value [capital gain], Both, or something else?

Trick question. For my parents and others. Their primary intention I suppose was rental property. They had it for 20yrs or so .. But obviously everyone's day comes to an end one day, so everyone will either sell it or pass it to their children (or others). But to most people it would be a fool not to consider capital gain right.

Tzoi

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#1133224 21-Sep-2014 20:01

It technically doesn't matter if their primary intention was not to sell it, so long as one of the purposes was with the intent of disposing of it. Generally the IRD would look at what you did with the property once you bought it though - if you bought it and rented it out for 10 years, they won't consider that you intended to dispose of it. It's more if you bought it and did renovations on it then sold it immediately that the rules would apply.

On the other point, I fully support a capital gains tax. Reality is, it won't come into force without an exception for owner-occupied housing and that distorts things quite a bit.

Batman

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#1133228 21-Sep-2014 20:15

if there is capital gains tax there should also be capital loss tax deduction?

if I buy an audi for the purposes of selling it, and lose 100,000 on it, I should be able get my tax annulled for 5 years?

what about losing $1000 on a canon camera when I sold it?

rayonline

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#1133229 21-Sep-2014 20:18

Ok then on that argument why are shares not exempt ...

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#1133230 21-Sep-2014 20:20

if they want to make more money they should consider removing ways for tax avoidance.

When I was at uni I couldn't get a student allowance, coz my parents pay tax.

But I have mates whose parents are extremely wealthy who would get full student allowance - because their parents don't pay tax.

matisyahu

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#1133231 21-Sep-2014 20:21

rayonline:
Aredwood: The law currently is that you must pay tax on capital gains if you bought the property with the intent of reselling it for a profit. And that tax is charged at your marginal tax rate. So anyone who claims that there is no capital gains tax in NZ currently is talking rubbish.

OP - what was your parents intention? Make money from rent, make money from increase in value [capital gain], Both, or something else?

Trick question. For my parents and others. Their primary intention I suppose was rental property. They had it for 20yrs or so .. But obviously everyone's day comes to an end one day, so everyone will either sell it or pass it to their children (or others). But to most people it would be a fool not to consider capital gain right.

I think when the issue of capital gain comes up then it is seem more in the light of flipping houses where as someone who owns a house for 20 years to rent tends to value the rent with any sort of capital gains being the icing on the cake rather than the first motivating factor. IIRC isn't there a clause that if you sell your property within 10 years you have to pay back all the depreciation that has been claimed back? I remember my parents mentioning something to do with with that.

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nova

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#1133311 21-Sep-2014 22:34

joker97: if there is capital gains tax there should also be capital loss tax deduction?

if I buy an audi for the purposes of selling it, and lose 100,000 on it, I should be able get my tax annulled for 5 years?

what about losing $1000 on a canon camera when I sold it?

I believe under the current law that you technically could offset your loss in these examples against your other income, provided you purchased the item with the intention to resell at a profit. You might however come under a lot of scrutiny by the IRD, and you may need to provide proof of your intentions, and you would certainly not want to have used the items for other purposes between buying and selling (i.e. no driving the car or taking photos).

A $100K loss would be unlikely to offset your tax for 5 years though, unless your income was very poor (i.e. roughly $20k per annum).

nova

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#1133320 21-Sep-2014 22:52

rayonline: Ok then on that argument why are shares not exempt ...

The tax treatment on shares is much the same as rental properties. If you buy shares to make money from their dividends, and happen to sell them at a later date for a profit, then the capital gain is not taxable. You of course pay tax on the dividends, just the same way you pay tax on your rental income.

Your intention at time of purchase is the key element, with the exception that once you are seen as a dealer in such items you are taxed regardless of what you claim your intention is.

Share funds are slightly different that individual shares, an actively managed share fund pays tax on the capital gains, but a passive index tracking fund does not. The former is viewed as trading shares for profit, whereas the later it is merely incidental.

mattwnz

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#1133326 21-Sep-2014 23:20

I know someone who purhcased a property, they never ended up living it, so they rented it out. However it was their intention to originally live in it. When they sold it, they were required to pay CGT on the profit they made. So NZ does have a CGT on property that you don't live in, and at least in some cases it is monitored. But I suspect in a lot of cases people never pay their share of tax on capital gains on the property, if the intention was to make money from it. So I can't really see how the current law is that much different to what labour proposed, apart from it being far less complex. Maybe just better policing of it is needed. The Labour CGT law would have created a huge number of jobs for the red tape involved, but as proven by the election, it wasn't a policy that the majority of people want

Geektastic

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#1133328 21-Sep-2014 23:33

joker97: if there is capital gains tax there should also be capital loss tax deduction?

if I buy an audi for the purposes of selling it, and lose 100,000 on it, I should be able get my tax annulled for 5 years?

what about losing $1000 on a canon camera when I sold it?

Yes of course you should. But those who advocate CGT usually prefer not to mention that part of the equation.

I will also add that there are many people in NZ, judging from newspaper comments etc, who appear convinced a CGT will be some sort of magic bullet for housing prices.

Trust me when I say it will make not the slightest difference. The UK has had CGT since 1965 and yet over the last 25 years the price of a 4 bedroom house in London has risen 523%.

Personally I think the problem is one of packaging.

A 'Capital Gains Tax' is something that sounds bad. Changing the way things work so that all income is taxed regardless of where it comes from is a more subtle way of doing the same thing which is less likely to alarm voters IMV.

Personally I don't like the idea that the government should be entitled to a percentage of everything we manage to scrape together in our lives.

mattwnz

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#1133331 21-Sep-2014 23:46

Geektastic:

I will also add that there are many people in NZ, judging from newspaper comments etc, who appear convinced a CGT will be some sort of magic bullet for housing prices..

Yes of course CGT will not affect house prices one little bit. That was just politcal spin to try and make it an emotional decision. The problem with house prices is supply of land, complaince costs, building costs, building material monopolies/duopolies , overpriced labour and shoddy workmanship which often means things need doing multiple times etc. So it is a range of different things

Tzoi

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#1133334 22-Sep-2014 00:18

joker97: if there is capital gains tax there should also be capital loss tax deduction?

if I buy an audi for the purposes of selling it, and lose 100,000 on it, I should be able get my tax annulled for 5 years?

what about losing $1000 on a canon camera when I sold it?

Generally when a CGT is imposed around the world, you can only deduct capital losses against capital gains, not against your other income. If you had lost 100,000 on it, you've decreased your tax a bit, but you've still lost that 100,000. If you had been using it for a few years for personal purposes, the IRD wouldn't consider it a capital gain/loss and you wouldn't be able to do anything with it.

joker97: if they want to make more money they should consider removing ways for tax avoidance.

When I was at uni I couldn't get a student allowance, coz my parents pay tax.

But I have mates whose parents are extremely wealthy who would get full student allowance - because their parents don't pay tax.

Removing ways for tax avoidance is a very broad statement and incredibly hard to do effectively. New Zealand has a GAAR - a general anti-avoidance rule, whereby the commissioner can deem some activity to be tax avoidance and then counteract it by undoing whatever transaction created it.

It's not so much they don't pay tax, it's that they don't have a reported income because their family has a business or trust that doesn't pay it out to them personally, it just accumulates in the trust or company. They'd still be taxed at the company/trust rate. At least I think that's how many people manage to get student allowance.

I think when the issue of capital gain comes up then it is seem more in the light of flipping houses where as someone who owns a house for 20 years to rent tends to value the rent with any sort of capital gains being the icing on the cake rather than the first motivating factor. IIRC isn't there a clause that if you sell your property within 10 years you have to pay back all the depreciation that has been claimed back? I remember my parents mentioning something to do with with that.

They shouldn't be able to depreciate a house that's being used for rental/personal reasons because they generally don't decrease in value. If they had been depreciating and then sold it for more than book value, they would have to pay tax on the depreciation recovery income, which is income based on the depreciation that has been deducted from your income but shouldn't have been. It's the same with any capital asset in a business - if they depreciate it too much they have to pay tax on the extra depreciation.

nova:
rayonline: Ok then on that argument why are shares not exempt ...

The tax treatment on shares is much the same as rental properties. If you buy shares to make money from their dividends, and happen to sell them at a later date for a profit, then the capital gain is not taxable. You of course pay tax on the dividends, just the same way you pay tax on your rental income.

Your intention at time of purchase is the key element, with the exception that once you are seen as a dealer in such items you are taxed regardless of what you claim your intention is.

Share funds are slightly different that individual shares, an actively managed share fund pays tax on the capital gains, but a passive index tracking fund does not. The former is viewed as trading shares for profit, whereas the later it is merely incidental.

It is possible to be taxed on capital gains of shares and it follow much the same rules as property - based on intention.

mattwnz: I know someone who purhcased a property, they never ended up living it, so they rented it out. However it was their intention to originally live in it. When they sold it, they were required to pay CGT on the profit they made. So NZ does have a CGT on property that you don't live in, and at least in some cases it is monitored. But I suspect in a lot of cases people never pay their share of tax on capital gains on the property, if the intention was to make money from it. So I can't really see how the current law is that much different to what labour proposed, apart from it being far less complex. Maybe just better policing of it is needed. The Labour CGT law would have created a huge number of jobs for the red tape involved, but as proven by the election, it wasn't a policy that the majority of people want

I find that quite surprising. I would not have thought they would have had to pay tax on that, though of course there may be extenuating circumstances there.

Personally I don't like the idea that the government should be entitled to a percentage of everything we manage to scrape together in our lives.

So you believe that there should be some forms of income that are not subject to tax at all? Not having a CGT is very distortionary as it is a significant part of people's income, especially for the wealthier people.

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