Capital Gains, Depreciation, and Property Transactions
Core framework
New Zealand has no general capital gains tax, but specific provisions tax certain gains, including the bright-line test for residential land, the land taxing provisions (intention, scheme, subdivision, and development), and depreciation recovery on sale. Candidates must know the depreciation rules, including the pooling method, the low-value asset write-off, and the building depreciation rules.
Key concepts: the bright-line test (a residential property sold within the applicable period is taxable, subject to the main home exclusion); the intention test; the 10-year land rule for certain disposals; depreciation recovery income when an asset is sold for more than its adjusted tax value; and the capital limitation.
Traps
- Assuming all property sales are tax-free; the bright-line test and land provisions can tax them.
- Forgetting that depreciation recovery is income, not a capital gain.
- Ignoring the main home exclusion and its conditions (e.g. use of the property, multiple homes).
- Misapplying the low-value asset threshold for immediate write-off.
Worked example
An asset costs $50,000, has accumulated depreciation of $30,000, so its adjusted tax value is $20,000. It is sold for $35,000. Depreciation recovery income = $35,000 − $20,000 = $15,000, taxable as income.
Rule of thumb
Ask: is the gain capital or revenue? Then check the bright-line and land provisions, and account for depreciation recovery.