The Government's new housing package goes against the advice of Treasury, which suggested the bright-line period be extended to 20 years.
Earlier on Tuesday, the Government announced its housing plan that is set to help first-home buyers get a foot in the door by assisting with deposits and expanding the property investment tax, as well as injecting billions to boost supply.
Part of this was an extension of the bright-line test - the tax on investment property - which will be increased from five years to 10 years, but it will be kept at five for new-build investment properties. The family home will still be exempt.
This goes against what Treasury advised the Government.
"The Treasury's preferred option is an extension of the bright-line period from five years to 20 years with no exemption for new builds," it said, according to its Regulatory Impact Statement.
"However it also considers a 15-year bright-line test is superior to the status quo, as it would help meet some of the Government's housing market objectives - but not to the same extent as a 20-year bright-line test.
"In the time available, the Treasury has not formed a view on whether a 10-year bright-line test is preferable to the status quo."
Treasury didn't recommend giving an exemption from the extended or existing bright-line test for early investors in a new build. This is because an exemption comes with "additional administrative and compliance costs" and over time "reduces the coherence of the tax system".
"While increasing housing supply is important, the Treasury considers there are likely to be better ways to directly support supply, for example through an explicit subsidy for developers."
Finance Minister Grant Robertson told reporters on Tuesday afternoon that advice hadn't been ignored, but the Government considered recommendations from officials and had come up with "what we thought was the right balance".
He believes a 10-year bright-line test "strikes the right balance".
Inland Revenue recommended against extending the bright-line.
"With the bright-line extension, a key concern is that many investors might pay substantial amounts of tax if they sold properties within 20 years but receive the gains tax-free if they held the properties for a longer period," it says.
It believes this would have a "lock-in effect" that would encourage people to hold onto properties, even if that wouldn't be sensible.
"This is likely to impede property from being used in the highest value ways. Also, the 20-year extension is likely to add to compliance costs."
