Taxing the gain: what would a capital gains tax actually do?

Capital gains tax is back on New Zealand’s political agenda. Labour has promised to introduce a targeted capital gains tax if elected in 2026, while National has pledged that it will not introduce one.

The debate has already produced the usual combination of tax jargon, frightening hypotheticals and arguments about whether landlords are hardworking investors or property-hoarding parasites. Before deciding who is right, it helps to understand what is actually being proposed.

What is a capital gains tax?

A capital gains tax, usually shortened to CGT, is a tax on the profit made when an asset increases in value and is later sold.

Suppose you buy an investment property for $500,000 and later sell it for $700,000. Your capital gain is $200,000. A CGT would tax some or all of that gain—not the entire $700,000 sale price.

Most capital gains taxes are “realisation-based,” meaning the tax is generally triggered when the owner sells the asset. You would not ordinarily receive a tax bill each year simply because your property had increased in value.

A CGT is therefore different from a wealth tax, which is usually charged regularly according to the value of the assets a person owns. It is also different from rates, which homeowners pay to local councils regardless of whether their property has been sold.

Does New Zealand already tax capital gains?

New Zealand does not have a comprehensive capital gains tax. However, some profits from selling property are already treated as taxable income.

The best-known example is the bright-line test. For residential property sold on or after 1 July 2024, the profit will generally be taxable if the property is sold within two years of its purchase, unless an exclusion applies. The family home is generally excluded, alongside farmland and business premises.

Selling after two years does not automatically guarantee that a gain will be tax-free. Other rules may apply where someone bought the property intending to resell it, has a pattern of buying and selling properties, or operates as a property dealer, developer, or builder. Mere appreciation, however, does not make a gain taxable by itself.

The result is a patchwork. Some gains are taxed depending on the asset, the seller’s intentions and how long the asset was held, while many others remain outside the tax system. The 2019 Tax Working Group described New Zealand’s treatment of capital gains as unusual among developed countries.

Why do people support a CGT?

The first argument is fairness. Income from salaries and wages is taxed as it is earned. By contrast, a person may make a substantial earnings from the increasing value of an investment and pay little or no tax on it. Supporters argue that it makes little sense to tax income differently simply because one person earned it by working while another gained it through owning an appreciating asset.

The Tax Working Group called this “horizontal equity”: the principle that people in similar economic circumstances should face similar tax obligations, regardless of how their income was generated. It concluded that the inconsistent treatment of capital gains benefits the wealthiest New Zealanders because ownership of assets that generate substantial gains is concentrated among wealthier households.

The second argument is revenue. Extending taxation to capital gains would broaden the tax base, giving the Government more money for services or allowing it to reduce other taxes. That revenue would not necessarily be stable, however. It would rise when asset prices and sales were strong and fall during economic downturns.

The third argument concerns where New Zealanders invest their money. When gains from some assets are tax-free while other forms of income are taxed, investors have an incentive to choose investments partly for their tax treatment rather than their underlying productivity. Supporters argue that taxing property gains could reduce the advantage enjoyed by property and encourage more investment in businesses, innovation, and other productive activity.

The Tax Working Group agreed that inconsistent taxation could distort investment decisions. However, it also acknowledged that the overall effect on productivity was uncertain: a CGT could improve the allocation of investment while simultaneously reducing after-tax returns and discouraging some saving.

What exactly is Labour proposing?

Labour’s proposal is considerably narrower than the broad CGT recommended by a majority of the Tax Working Group in 2019.

Under Labour’s policy, a flat 28% tax would apply to gains on residential investment properties and commercial property. The family home (including lifestyle blocks) would be exempt, along with farms, shares, KiwiSaver, businesses, inheritances, and personal possessions.

The policy would be forward-looking. Properties would receive an opening value on 1 July 2027, and only increases after that date would be taxable. The tax would generally be paid when the property was sold.

Suppose an investment property was worth $800,000 on 1 July 2027. Its owner later spent $50,000 improving it and sold it for $950,000. The taxable gain would be $100,000 after deducting the improvement costs, producing a $28,000 tax bill.

Costs associated with buying the property and making capital improvements could be deducted when calculating the gain. Rates and interest would not be deducted from the capital gain. Capital losses could be carried forward, but they would be ring-fenced, meaning they could offset future gains from similar assets rather than salary or other income.

Labour estimates that the tax would raise an average of $700 million a year across its forecast period, although revenue would begin at only $100 million in 2027/28 before increasing as more properties were sold with post-2027 gains. Labour says the money would be ring-fenced for healthcare, beginning with three free doctor’s visits each year for every New Zealander.

Its narrow scope makes the proposal politically easier to sell: most homeowners, KiwiSaver members, and small investors would not pay it directly. But the exemptions also weaken the claim that the policy would treat all forms of income equally. Gains from shares, businesses, farms, and expensive owner-occupied homes would remain untaxed.

Why does National oppose it?

National argues that taxing investment gains would discourage people from saving, investing, and building businesses. Its position is that people who take financial risks and build assets should be allowed to retain the reward, rather than face an additional tax when they sell.

The party also argues that the policy would make the tax system more complicated, increase Inland Revenue’s administrative costs, and make New Zealand less attractive to investors. National has promised that it will not introduce a CGT.

These concerns are not entirely invented. A realisation-based CGT can produce what tax economists call “lock-in.” Because the tax becomes payable when an asset is sold, an owner may delay selling simply to postpone the bill, even when somebody else could make better use of the asset. Valuing properties, recording improvements, allocating mixed business and property gains, and policing the boundary between exempt and taxable assets would also create additional work for taxpayers and Inland Revenue.

But maintaining the present system also creates complexity. Inland Revenue must currently determine whether a gain is taxable by examining matters such as the purchaser’s original intention, their history of transactions, and the nature of their business. The choice is not necessarily between a complicated CGT and a perfectly simple status quo.

Would it increase rents?

This is one of the most disputed parts of the debate.

National argues that taxing gains from rental properties would make them less attractive to investors. If landlords sold their houses and fewer rental properties were available, tenants could face greater competition and higher rents.

Labour responds that rents are primarily determined by what tenants can pay and by the supply and demand for housing, rather than by a tax charged years later when a property is sold.

The Tax Working Group’s conclusion sat somewhere between the two. It expected a CGT to place some small upward pressure on rents and downward pressure on house prices, but found no evidence of a general rent surge following the introduction of similar taxes overseas. It also cautioned that broader factors (such as housing construction, land availability, population growth, and interest rates) would probably have a much larger effect than the tax itself.

A landlord leaving the market also does not necessarily make a house disappear. The property may be purchased by another landlord or by a former renter becoming an owner-occupier. The effect on rents therefore depends on who buys the property, whether new homes continue to be built and how the wider housing market responds.

What about KiwiSaver?

Labour’s proposal explicitly exempts KiwiSaver, shares, and business assets. KiwiSaver members would not personally receive a CGT bill on the growth of their funds.

National nevertheless argues that returns could be affected indirectly where a fund has exposure to businesses or property affected by the tax. Labour calls that claim misleading because of the policy’s exemptions. The extent of any indirect effect would ultimately depend on the final legislation and the investments held by each fund.

So, should New Zealand introduce one?

That depends on which problem you think matters most.

A CGT could make the tax system more progressive, collect revenue from gains that currently escape tax, and reduce property’s preferential treatment. But it would also create new valuation and compliance costs, discourage some transactions and potentially place limited upward pressure on rents.

Labour’s proposal attempts to balance those concerns by taxing only investment and commercial property. That makes it less disruptive than a comprehensive CGT—but also less capable of fixing the wider inconsistency between the taxation of work and wealth.

The real debate is therefore not simply whether capital gains should be taxed. It is about which gains should be taxed, which assets should be protected, who would ultimately bear the cost, and what the Government should do with the money.

Have your say in whether a CGT is implemented: the 2026 General Election will be held on Saturday 7 November. Voters must be enrolled by midnight on Sunday 25 October, before advance voting begins the following day.