Here’s what a capital gains tax means for commercial property

Wednesday, 29 October 2025

The inclusion of commercial property in Labour’s capital gains tax policy has surprised experts, after leader Chris Hipkins talked of changing a system that rewarded property speculation.

Labour’s plan announced on Tuesday is essentially an extension of the bright line test on investment property.

While the tax, which will apply to capital gains made after a “valuation day” in 2027, exempts the family home and farms, it will include all other residential and commercial property transactions.

Commercial property has traditionally been considered a long-term investment, rather than a speculative endeavour.

Bayleys head of insights and data Chris Farhi said it was not a good idea to disincentivise investment in a productive part of the economy.

Commercial property was an important part of the economy as it provided crucial office, retail and industrial space for businesses to operate out of, he said.

“Any tax that is introduced into the sector is a net negative, and is not a good thing to be added to the market.”

But there were a couple of factors that made the commercial property market different to the residential market, he said.

One was that investors, especially the bigger players, usually held property for the long term so the prospect of them paying much in capital gain taxes in the short-term was pretty limited.

“The odds are that people will simply hold off selling their properties until the rules are changed again.

“There seems to be a fairly bullish sentiment out there that if a capital gains tax is imposed it will then be removed by a future government.”

Commercial investors tended to be astute people with good lawyers and accountants, and would look at what loopholes might be available to avoid being limited by the tax, Farhi said.

“Assessing a certain level of transactional activity is one thing, but how the market plays out on the ground is another.”

For Property Council chief executive Leonie Freeman, the introduction of a capital gains tax would have an impact on local and overseas investors, although it was hard to quantify how much.

It was not just about a capital gains tax in isolation, it was about a full suite of factors, and a higher level of detail was required to understand what the policy might mean, she said.

“You need to think about it more broadly, so if commercial property was subject to a capital gains tax does that meant commercial depreciation would be reinstated?

“How do you manage upgrades and refurbishments, which are required for seismic and sustainability work, for example. Will there be off-sets? It all goes hand in hand.”

At a media briefing, Hipkins said commercial investors would be able to deduct improvement costs from their final capital gains, but the party had yet to make a call on depreciation, and would do so as part of its fiscal plan.

Freeman said New Zealand was the only country in the OECD that did not allow commercial depreciation, and that impacted on the country’s attraction as an investment option.

“But the fact New Zealand doesn’t have a capital gains tax is attractive, so introducing one would be likely to have an impact on offshore investment in commercial property.

“There are a number of factors investors weigh up, including what is going on globally, but New Zealand does have challenges as an investment destination, such as the size of the market.”

If depreciation was reinstated, while the proposed capital gain tax was introduced, investors would look at what the end result of that might be for the bottom line and whether the feasibility stacked up, she said.

“It will be interesting to see where build-to-rent properties sit in all of this. If the Government doesn’t want people ‘speculating’ on residential investment, you still need rental accommodation, so what would a capital gains test mean in the build-to-rent space?”

Property Investors Federation spokesperson Matt Ball said policies targeting investors, or any group, for special tax treatment were inherently unfair.

He did not understand why commercial property was being characterised as speculation, and targeted.

“If you are investing in commercial property, you are doing it to provide an asset for other people’s business. Why tax that when you are trying to encourage more business? And why not tax farms, which are a business?”

It was also unfair to single out residential investors, or businesses providing rental accommodation, he said.

“Other businesses are fine, apparently, but if you want to provide a warm dry home for other people to live in, you must be punished. It doesn’t make sense. Surely, we want more homes for people to live in, not less?”

The fact there would be deductions on improvements to properties under the policy was positive, and the policy could have been worse, he said.

“They could have brought back their previous policy of removing interest deductibility on residential rental accommodation, which wreaked havoc on the market - driving up rents and reducing the number of homes available.”

Ball called on Labour to make it clear that interest deductibility was dead and buried as leaving the question open created uncertainty and risked reversing recent rental market improvements.

Investors were nervous, and anecdotally many were revising their investment strategies, he said.

“They are getting ready to get out if there is a change of government. Introduce taxes like this and people who have current investments start to look at selling up, while future investors will think twice about investing.”

At the media briefing, Hipkins did not commit to not bringing back interest deductibility, and left the question of a wealth tax open, and dependent on Labour’s potential coalition partners.