Labour policies could help property speculators

Labour’s monetary and tax policies could benefit property speculators in several ways, despite continued claims by leader David Cunliffe and finance spokesperson David Parker that under National speculators are not taxed (they are taxed, see Property speculators are taxed).

Cunliffe “Speculators…getting rich on tax-free capital gains”.

Parker: ““National Party, despite the fact that we had 40 percent house inflation, they’re not doing anything about it. Not taxing speculators…”.

Reducing lending rates, exempting family homes from Capital Gains Tax and lower rates of CGT could all benefit property speculators by reducing their costs and tax.

Reduced lending rates

In Labour’s Monetary Policy Upgrade announced yesterday they said they would allow for increasing Kiwisaver contributions to help keep the official cash rate (and lending rates) lower.

Give the Bank a new tool to adjust universal KiwiSaver savings rates as an alternative to raising interest rates. This would mean Kiwis would pay money to their retirement savings instead of higher mortgage payments to overseas banks.

Property speculators who borrow money to fund their property developments and house purchases will benefit from lower interest rates.

Family home exempt CGT

In his policy speech yesterday yesterday David Parker reiterated that family homes would be exempt CGT.

Our capital gains tax pushes against the tax bias which currently encourages capital into the speculative sector at the cost of the productive sector.

In addition to improving the economy, this will make the tax system fairer, and will take pressure off house prices.

As in most other countries, it will not cover owner occupied homes. The family home will be exempted.

A common way of property speculating and dealing is to purchase a home and live in it (as a family home), do it up, then sell it to benefit from a capital gain.

In Mistaking property dealing for property investment Inland Revenue make it clear that currently purchasing a ‘family home’ with the intention of reselling it is speculating and is taxable.

Some property buyers refer to a “buy and flick” strategy. This approach is most likely to mean you are a property speculator or dealer for tax purposes.

If one of your reasons for buying a property is to resell it, whether you live in it or rent it out, you’re speculating in property and your profit is likely to be taxable.

Labour would appear to exempt this type of speculating from CGT.

Reduced CGT rate

Inland Revenue state:

Dealers and speculators must pay income tax on any gain they make from reselling their property.

If that is replaced by a Capital Gains Tax it could reduce the rate they are taxed. Labour’s proposed CGT rate is 15%.

Income tax rates for individuals (excluding ACC Earner Premium):

  • up to $14,000 10.5 cents
  • from $14,001 to $48,000 17.5 cents
  • from $48,001 to $70,000 30 cents
  • $70,001 and over 33 cents

Any earnings at all (not just from property speculating) over 14,000 are currently taxed at a higher rate than the proposed CGT.

Note: it’s not clear exactly how Labour would handle these situations. Their monetary policy and CGT could be modified with exceptions and additional requirements.