Property investment is a near perfect investment model and one that other asset classes struggle to emulate. The advantage fundamentally comes from the hardness of land/property as an asset and it being a dependable store of value over the long term. These qualities mean it is the preferred collateral for banks.

Many of us will remember the good ol days when property could be geared and losses used to offset our other income for tax purposes. When interest on loans was fully tax deductible, houses could be depreciated, and when there was no bright line capital gains tax on sale of the property.

These indeed were the halcyon days for residential property investors, when tax policy settings treated taxpayers consistently and when the tax system was not being used as a tool to influence investment behaviour to attempt to fix problems that had their roots elsewhere.

These tax benefits were not confined to property investors; all taxpayers who were in business or held assets to earn income were treated the same. Things were fair and principled back then.

Progressive changes to the tax and residential tenancy laws have taken the sheen off residential property as an investment class.

The tightening of the tax rules was kicked off by the John Key, National led Government back in 2011/12 with the removal of depreciation on residential houses. While property investors at the time were not ecstatic about the change, removing depreciation on houses was at least principled and fair – residential houses didn’t depreciate (usually), they appreciated.

The introduction of the 2-year bright line rule was less principled but at least a measured attempt to tax property speculators who were acquiring properties to flick at a profit. Up until then the only legislative tool the Inland Revenue had at its disposal to tax a speculator was if there was proof that at the time the investor acquired the property, they had they had done so with the purpose of disposing of it. This intention was often hard to prove and could be refuted, particularly if there was no evidence to indicate their intention to sell, and if they had a half-credible alternative reason.

The bright line rule drew a clear bright line in the sand. Investors would either be taxed, or they wouldn’t be under the rule. Those who did not purchase with the intention to sell but were selling for genuine reasons were the collateral damage. However, 2 years was not an onerously long period for most, and in a lot of cases investors could wait out the 2-year period before selling.

The Jacinda Ardern, Labour era saw a deviation from the principled, measured approach to tax reform in this area to one where the tax system was used as a blunt policy tool to unabashedly shake investors out of the market. All for the stated purpose of levelling the playing field for first home buyers. A flurry of tax changes followed. The Brightline period increased from 2 years to 5 years in 2018, interest was ring-fenced in 2019 and could only be used to offset future income from residential property, and not taxpayers’ other income.

Labour’s second term saw the increase in the bright line period to 10 years in 2021 and the phase out of interest deductibility from the 2022 tax year.

The National led coalition Government has set about putting the tax rules back to where they largely were under the John Key National Government. Back to a 2-year bright line period and the phased reinstatement of full interest deductibility. This acknowledges that the tax system is not the elixir to New Zealand’s housing supply and affordability woes and heralds a back to basics, first principles approach where the structural, supply side issues are addressed.

Grant Neagle, a director at Ingham Mora Chartered Accountants in Tauranga, is a business advisor and tax specialist. He can be contacted on 07- 927- 1225 or grant@inghammora.co.nz