Labour’s proposed Capital Gains Tax risks taxing inflation rather than genuine wealth creation. By applying a 28% tax to nominal gains on residential and commercial property acquired from 1 July 2027, the policy would tax increases in asset values caused by rising prices as well as real investment returns.
If Labour forms the next government, its proposed Capital Gains Tax (CGT) would apply when those assets are sold in the future, with an exemption for the family home and farms.
Supporters inevitably argue this is about “fairness” and ensuring capital income is taxed more like other forms of income. We as a country have had this debate several times in the last 15 years, most recently in 2018 when Labour’s tax working group led by the late Sir Michal Cullen recommended a comprehensive CGT. Those debates, widely covered in the media led to an embarrassing U-turn by then Prime Minister Jacinda Ardern who famously ruled out a CGT as long as she was Prime Minister.
The 2026 Labour Party have yet again proposed a CGT - this time a somewhat watered down version. So far in the build up to the 2026 election this has not received much in the way of media coverage.
A major issue with the policy is that it taxes nominal gains rather than real gains . In an inflationary economy, that distinction is critical because not all increases in asset values represent genuine gains or increases in wealth.
Over the past two decades, New Zealand residential property prices have increased by approximately 6% per year on average, based on long-term property price data such as the Reserve Bank’s residential property price series and market datasets such as CoreLogic. Over the same period, consumer price inflation has averaged around 2.7% annually, based on Statistics New Zealand Consumer Price Index data.
These figures are broad historical averages rather than a forecast or a guarantee of future returns. Property growth varies significantly between regions and time periods, and inflation has also fluctuated. However, the comparison illustrates the underlying issue with taxing nominal gains.
Using these long-term averages as an example, only around 3.3 percentage points of a 6% annual increase would represent a real increase in purchasing power after allowing for 2.7% inflation. The remaining 2.7 percentage points would largely reflect the effect of rising prices over time rather than a genuine increase in economic wealth. This component of any gain on sale is essentially bringing investors back to what I refer to as “break even” on their investment capital.
Yet Labour’s proposal would tax the full nominal gain.
The arithmetic is revealing.
A 28% tax on a 6% nominal gain equates to a tax of 1.68 percentage points. When measured against the illustrative real gain of 3.3 percentage points, the effective tax rate on the inflation-adjusted gain would be approximately 51%.
In other words, while the headline tax rate is 28%, the effective burden on the actual increase in wealth could be around half of the real gain under these assumptions.
The precise outcome would depend on the actual purchase price, sale price, holding period, inflation rate and property performance. However, the example demonstrates a key feature of the policy: taxing nominal gains can significantly increase the effective tax burden when inflation accounts for a substantial share of the increase in asset values.
Internationally, many countries recognise the challenge of taxing capital gains in an inflationary environment. Some adjust the cost base of assets to reflect inflation before calculating taxable gains, while others apply lower tax rates to capital gains.
The United Kingdom generally taxes residential property gains at rates of 18% or 24%, depending on the taxpayer’s circumstances. The United States generally taxes long-term capital gains at preferential federal rates ranging from 0% to 20%.
Labour’s proposal does neither. It applies a 28% tax rate to nominal gains without any adjustment for inflation.
The impact becomes even more significant during periods of higher inflation. Ironically periods of high inflation generally follow periods of high government spending - a feature of many Labour governments.
Between 2019 and 2024, New Zealand experienced average annual inflation of approximately 3.8%, based on Statistics New Zealand CPI data. If an investor had experienced the average property growth of around 6% per year over that period, only about 2.2 percentage points of the annual increase would represent a gain after adjusting for inflation.
Under that illustrative scenario, taxing the full nominal gain at 28% would result in an effective tax rate of roughly 76% on the inflation-adjusted gain.
This is not a prediction of what every investor would experience, nor does it account for other factors such as transaction costs, financing costs or changes in property values. Rather, it highlights the sensitivity of the policy to inflation. The higher inflation becomes, the greater the gap between nominal gains and genuine increases in wealth.
That creates huge uncertainty for long-term investment decisions.
Investment depends on expected after-tax returns. When investors know that inflation-driven increases in asset values will be taxed alongside genuine gains, the expected real return falls. Some investments that would otherwise be economically viable may no longer justify the risk, capital commitment and compliance costs involved.
This creates a significant risk that capital will move away from property investment in New Zealand, not because New Zealand’s need for housing and commercial buildings has declined, but because the after-tax returns become less attractive.
The consequences could extend beyond investors.
A reduction in private investment in rental housing could put further pressure on the supply of rental properties. Landlords facing higher tax costs and lower expected returns may seek to recover some of those costs through higher rents, meaning part of the burden could ultimately flow through to tenants.
The extent to which this occurs would depend on market conditions, including housing supply, demand and competition between landlords. However, economic theory suggests that when the costs of supplying a good increase, some portion of those costs can be reflected in prices.
At a time when New Zealand is already facing housing affordability challenges and rental pressures, we need to consider whether reducing investment incentives could unintentionally worsen the problems the policy is intended to address.
The same concern applies to commercial property.
Commercial buildings require significant long-term investment and provide the foundations for businesses, offices, warehouses, retail outlets and industrial activity. If the expected after-tax return on these investments falls, developers and investors will be less willing to commit capital to new projects.
Over time, weaker investment incentives could contribute to fewer new-build houses, fewer rental developments and less commercial property construction. Reduced supply could place upward pressure on rents, property costs and business operating expenses.
Ignoring inflation in a CGT creates arbitrary outcomes, particularly for assets held over long periods.
That is why many countries have adopted inflation adjustments or lower tax rates for capital gains.
Labour’s proposal does neither.
Instead, it risks creating a high effective tax burden on real capital gains compared with many comparable developed economies, despite having a headline rate of only 28%.
The objective of tax reform should be to create a fair system that raises revenue without discouraging productive investment, reducing housing supply or imposing arbitrary penalties caused by inflation.
As voters consider the competing tax policies on offer at the next election, they should look beyond the headline numbers. The critical question is not simply what statutory tax rate Labour proposes, but what rate investors will actually pay on their real economic gains after inflation is taken into account.
New Zealanders should ask whether a policy that can effectively tax inflation-adjusted gains at rates approaching 50% or more is the right way to encourage investment, build housing supply and support economic growth.
If Labour are in a position to form a government later this year , New Zealand risks creating a tax system that heavily penalises investment and taxes inflation instead of real gains on sale.