Property sales dropped dramatically across New Zealand throughout January as investors held off on purchasing property amid the confusion over what tax reforms the New Zealand government would make. The Tax Working Group released a report in early January that recommended the government remove the right of investors to claim depreciation on a rental property, which would make investment in property more expensive.

The second recommendation by the Tax Working Group was to tax an investor’s net equity in an investment property, instead of the current capital gains tax system, creating an annual cost for investors. This uncertainty about what recommendations the government would implement led to the low sales with just 3,666 properties sold in January.

The President of the Real Estate Institute of New Zealand, Peter McDonald, said the Prime Minister’s opening speech to Parliament had helped to clear the air and should help to encourage investors to continue to invest in the property market. “[The Prime Minister] indicated the Government has ruled out proposals to introduce a land tax, comprehensive capital gains tax, or new tax on residential investment properties,” Mr McDonald said. This should reduce fears and the investors will return to the market soon.

While new entrants into the housing markets may find the proposed tax changes increase home affordability as housing and land values drop, the recommended changes will be likely to have a negative impact on some investors, according to the Property Institute of New Zealand President, Ian Campbell.

He suggested that some groups of people would be unfairly taxed by the introduction of a land tax where there is not necessarily any relationship between owning the land and having an income to pay the tax and cited Maori Trust groups and retirees as a case in point. “Land tax would add a significant burden to the household, particularly rural land holdings,” Mr Campbell said.

The Tax Working Group said the current tax rules for residential property were not sustainable in the long-term, as the tax rules generated $500 million in tax losses for the government. While many people within the real estate industry agree, the uncertainty about which recommendations the government should implement to solve the problem has caused investors to shy away from property investment.

Unlike a capital gains tax, which you only pay when you sell the property, a tax on the gain in the net equity of an investment property is an annual cost investors may have to pay. Investors who rely on claiming the depreciation as a way of reducing the total tax bill on the income may find that the proposed changes will affect their current investments into property.

However, the reality is that even if the tax changes reduce the benefits for investing in property on an annual basis for investors, the real benefit of investing in property is the increase in the value of the property over time. Whether the government makes changes to the tax rules surrounding investment properties or not, properties will continue to increase in value over time, giving overall benefits to property investors.

Investing in property is more about having security in the long-term than gaining benefits from short-term tax-based subsidies, so investors still will have plenty of reasons to invest in property in future months.

Even with the reduced number of sales in January, the median property sale price still increased, so investors can take comfort in that fact. The proposed changes to the tax laws may reduce the subsidy effect on investing in property, but are not likely to impact on the growth of property value in the long-term. As most people invest in property for the long-term gain, the proposed changes will have less impact on the overall investment than has been portrayed.

The New Zealand government has not yet decided which recommendations from the Tax Working Group to implement and while the uncertainty is having an impact on sales in the short-term, investors should consider the continuing long-term benefits of investing in property. If the government does decide to implement the tax reform recommendations, the annual cost of investing in property may increase slightly, but the value of the property should continue to make the investment worthwhile.