The gloss to come off owning a lifestyle block
Proposal could put sting on lifestyle living
The desirability of a lifestyle block has suddenly lost its gloss going by Real Estate Institute NZ calculations on the high number that would be caught by the capital gains tax proposed by the Tax Working Group.
Under the proposal, land larger than 4500sq m would not be eligible for the family home capital gains tax exemption. REINZ chief executive Bindi Norwell said the institute data showed 92 per cent of lifestyle blocks sold in New Zealand last year were bigger than that.
The median size of lifestyle properties sold in that time was
20,000sq m. There are 178,778 properties classified as “lifestyle” in New Zealand.
Working group member and PwC tax partner Geof Nightingale said the potential picture of a lifestyle property CGT was not reflected accurately on social media.
He said “you get into very arbitrary territory” when designing a capital gains tax that excludes the family home and having to define what a family home is.
“The working group landed on
4500sq m because that is the current definition of land that goes with a
house that presents for GST purposes when, for example, a farm is sold.
“The working group also said
4500sq m was just a suggestion (when) you define what amount of land is reasonable for the occupation and enjoyment of the actual house — in some cases it might be less or might be more.
“That is going to be an area of real interest in submissions if the Government takes forward any of this proposal. What is the family home and what land comes with it is going to be the debate.”
Nightingale said using the REINZ’s median lifestyle block size of
20,000sq m as an example, the house included on 4500sq m of land would not be subject to a capital gains tax.
“But the
15,500sq m round it would potentially be subject to capital gains tax on any gain that related to that land.”
By way of example, Nightingale said: “Let’s say I bought a lifestyle property out at Helensville 10 years ago for $1 million, and it sits on
10,000sq m — so it’s a four-bedroom house on 10,000sq m of land.
“If this (CGT) comes in on the first of April 2021, let’s say that lifestyle property is now worth $2.5m total, which is not unrealistic after this time.
“Along comes the valuer and says the value of the house and 4500sq m of land is actually $2m and the value of the other 5500sq m of land left is half a million dollars.
“Then the cost base of your capital gains tax for those assets becomes half a million dollars.”
“Let’s say in 2023 that lifestyle property holder sells the whole block for $3m. They are then going to have to apportion that $3m.
“The valuer might say now the house is worth $2.2m and the 5500sq m of land under capital gains tax is $800,000 proceeds.
“The cost base is established when the asset is transitioned into the regime of half a million dollars so you have a taxable gain now of $300,000 and that is going to be taxed at your marginal rate.” Norwell suggested it was possible the Government might retract the proposal to tax lifestyle properties on profit at sale or change the parameters once it knew how many people would be affected.
She said a CGT could have what it called “the mansion effect”. “They will invest everything in their own properties and not put it into other assets. They’ll have all their eggs in one basket and over-capitalise. In terms of an investment portfolio that’s probably not the best thing.”