A week has gone by and we’re still talking about Capital Gains Tax (CGT).
News websites across the country have started to produce calculators which are supposed to tell you how much CGT you would theoretically pay if you sold a property. Yet one crucial thing is being left of of these calculators, and discussions about CGT in general. Will the interest on your mortgage paid be deducted from your capital gains?
Notably a CGT policy has not yet been produced off the Tax Working Group’s recommendations; it’s just recommendations at this point. The Labour-led Government has said that a CGT could not be negatively geared so any deductions applied – which should be included if the CGT is as comprehensive as they are planning – would top out at the capital gain value.
So if you paid 33% of your mortgage’s calculable interest payments, then you should owe 0% CGT. If you paid any more, you would not get a rebate or transferable deduction (i.e. to another property).
However, if the Government does not allow for this deduction (which is possible – in the name of the often-touted “fairness” goal), then you could end up paying 33% of your capital gain despite what you have paid already in interest to the bank.
Thus if no deduction is applied, property owners would probably be incentivised to keep their properties for only a short time, and pay the interest only (as they personally don’t benefit from any investment in a property if it is appreciating in value below a certain threshold), or for a long time, i.e. 15-20 years. This kind of distortion (rather than an even spread across short/medium/long term property-ownership) will probably have some interesting effects:
1. Worsening quality rental stock (minimal investments after all)
2. The second-tier stock (i.e. $600,000-$800,000 houses) would probably thin away from a bracket median. Some would be left without repair and investment, some would go significantly up in value as owners are incentivised to invest enough to make long term ownership
3. Short-term property holding would probably lead to landlords changing more regularly, and as a probably result disrupt renters’ quality of life either thorough being kicked out, or changes in rents
We have no idea what Labour is planning here, or even if they’ve even thought about deducing interest already paid from one’s capital gains.