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Why do home owners buy and sell in short succession and lose money due to capital gain tax (Bright-Line Test) or change of personal circumstances?



Moving Household

Buying/Selling—Capital Gain and Taxation

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Why do home owners buy and sell in short succession?


The housing culture seems to have lots to do with moving households frequently. Comparing statistics of different countries certainly there are similarities. For instance a survey revealed that 43% of Australians moved house over the last five years. The figures in NZ are similar. Changing demographics, mobility and the desire to improve the lifestyle are good reasons for relocating, while the proportion of people moving for employment reasons have been shown low. That is surprising. I expected that income and career are on the top of the list.


Selling and buying a house is a stressful or time consuming process. Why then do people do that in short succession?  Seen by friends and former colleagues, who belong to this category of home owners, they bought and sold within few years because of three simple reasons;


· Purchased the wrong house or in a wrong neighbourhood,

· Personal circumstances have changed,

· Riding the wave of capital gain




Capital gain and taxation



In housing cultures like NZ, capital gain is over valued and that is why people work in slavery for the bank lifetime long only to pay off their mortgage. That trend has been fueled by housing policies, immigration and monetary restrictions for investors resulting in a permanent shortage of housing in the past decade. The deficit between demand and supply has been driving up house prices to levels characterized as “unaffordable”.  Now, in the forefront of the election in 2017 fiscal policies has been introduced to stop riding the wave of capital gain. One of the policy changes so called “Bright-Line Test for Residential Land”, introduced with the Taxation Act 2015, is targeting those home owners.


Now buying and selling in short order exposes home owners to tax duties and has become a financial setback. Even when being reimbursed with financial gains (capital gain) people keep quiet about the “true costs”.


Emotionally stressed out first home buyers rush into high mortgages pushed by fear to miss out. When taking financial risks does not work out, selling with loss is not a good start on the property ladder. I have seen too many homeowners with mortgage costs twice of the property value to be paid over decades. Because of the amount of debts  offsetting these costs by capital gains might become difficult due to changing policies.


Yes, I hear you saying that the lending costs have dropped to record lows (currently around 4-5%). Good reasons to go onto the property ladder. True, but consider related reasons why finance is so competitive. Look at the job market, economic growth and  financial stability— a cheap mortgage is not helpful without job security.




Change of personal circumstances—are you prepared?


Owning a family home comes with obligations. Unpredictable events you can’t control happen, but pro-actively insurance might cover the risks. Personal circumstances change over time as well, but can you be insured against relationship breakups, becoming a parent with twins, or losing the ability working in your profession?


How can you be actively be prepared?


[1] Choose the right ownership type with your partner and have a exit strategy in place.

[2] Find the right house type (stand-alone house on free-hold title, flat on unit title/cross-lease, or an apartment) and the location that supports your lifestyle,  family and prosperity.

[3] Think about financial risk management; if you have to move household for any reason, would you sell or keep your house for renting out?




Reducing tax duties—it that an option for you?



Real Estate marketing uses the term home and income property for residential housing that has a main dwelling and a second flat (unit) attached to it. The owner-occupier  lives in the main house and rents out the smaller flat for a second income.


The beauty of buying a home and income property is the tax advantage. The second rental flat can be treated as investment and related expenses inclusive the percentage of mortgage interest payments are income tax deductible. A great way to share housing costs with other people. When the space is needed for grown up kids or family in future, it is easy to make fiscal adjustments.




Homeowner’s risk - low resale value


Looking at the resale value you will possibly agree that properties with limited space, lack of control (managed by Body Corporate or leasehold properties) and homes in remote locations (limited public services and infrastructure) have a limited potential when the time is right for selling.


Apart from personal circumstances home owners don’t like the prospect of losing money due to the property cycle and downward trends for properties low in demand. That is why home buyers should consider the resale value before signing the purchase agreement.




Not so often admitted by homeowners here are three reasons for re-selling a property in a short period of time:

· Property defects difficult to fix (leaky homes)

· Impact of crime, wrong area or nasty neighbours

· Body corporate (management) issues






Take Away

Things in life keep changing and the house you own should reflect that. Selling and buying a house is stressful, time consuming and capital gain tax (Bright-Line Test) is often one reason for  losing money.  Be actively be prepared by due diligence when buying, sufficient insured as owner and review annually your financial risk management.

Good luck




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