For many US citizens living in New Zealand, US capital gains tax on the sale of NZ assets is a common concern.
Part of the reasoning behind this is the misunderstanding that New Zealand has no capital gains tax, which is actually not the case.
New Zealand’s Bright Line Tax and the United States’ Capital Gains Tax are two tax policies that indeed very similar, however the US tax is far more broad and far reaching. Both policies relate to the tax paid on the profit made from the sale of property, and it is essential to understand how they correspond to each other.
New Zealand’s Bright Line Tax was introduced in 2015, as part of efforts to curb speculation on the property market. It requires individuals who sell a residential property within ten years of purchase to pay tax on any gains made from the sale. The tax rate for the Bright Line Tax is typically at the individual’s marginal tax rate in New Zealand. There is however some variation on when the tax will be applied, dependent on the date the property was acquired:
- on or after 27 March 2021 and sold within 5 years for qualifying new builds or within 10 years for all other properties
- between 29 March 2018 and 26 March 2021 and sold within 5 years
- between 1 October 2015 and 28 March 2018 and sold within 2 years
On the other hand, the United States’ Capital Gains Tax is far more broad, and includes tax on the profit made from the sale of assets such as stocks, bonds, vehicles or any other assets, in addition to real estate.
As US citizenship is tied to tax residency, it does mean that US citizens selling assets in New Zealand are still subject to US capital gains tax.
For individuals who are liable for both the Bright Line Tax and the US Capital Gains Tax however, double taxation need not be a concern. Fortunately the double taxation treaty in place between New Zealand and the USA allows for a credit to be claimed when a substantially identical tax has been paid in one of the other countries. In the case of real estate, the country where the property is physically located has the primary right to tax.
The foreign tax credit allows US taxpayers to claim a credit for the tax they paid in New Zealand, up to the amount of US tax owed on the same income. For example, if an individual paid $10,000 in Bright Line Tax in New Zealand, and their US Capital Gains Tax liability on the same property sale was $12,000, they could claim a credit for the $10,000 they paid in New Zealand, effectively reducing their US tax liability to $2,000.
Having a good understanding of tax laws in both NZ and the US before purchasing and selling property is essential to ensuring tax efficiency. Seeking professional tax advice from a qualified tax advisor can help ensure compliance with both New Zealand and US tax laws.
For any questions, please feel free to contact US Global Tax on 093732949.