The taxation of property in New Zealand is an increasingly complex area of law and can be a minefield for the unprepared. Although there is no comprehensive capital gains tax in New Zealand, income from trading in property is taxable.
As a general rule, if your intention is to make a profit when you sell the property, you will likely have to pay tax on the profit from the sale. However, to complicate the matter further, there are different rules for rental/ investment properties, holiday homes, family homes and family homes held in a Trust.
This article offers a broad summary of the key issues and outlines your potential tax liabilities under common circumstances. For detailed insight into your personal situation and potential property tax liability, it is always a smart move to have a talk with your accountant before selling or buying.
Intention is Key
It is extremely important that you think carefully about your intentions towards a property when making a decision to purchase. It is this initial intention that will ultimately determine if you have to pay tax or not. If you are in the property industry or associated with someone who is, you will also be under much closer scrutiny.
The new rules brought into effect in 2015 (the bright-line test) requires you to provide your IRD Number when making a property transaction. This serves to make it much easier for the IRD to assess tax liabilities on property sales and identify those in the property industry who are selling property for a profit.
The IRD has more funding than ever before to catch tax evaders and property tax is a key area of interest to them. Make sure you don't take any unnecessary risks with your family's most important asset, consult with professionals as soon as you have a query.
The Bright-Line Test
Any residential property purchased after the 1st of October 2015 is subject to the Bright-Line Test. This means that you are automatically liable to pay tax on any profit if you sell the house within two years of the purchase date.
However, there are few exceptions to this 'rule'. The biggest exception is that the bright-line test doesn't apply to the sale of your family home. However, if you have a history of buying and selling within short time frames, the IRD may deem you to be in the business of trading in property. This changes things.
Your Property Past Matters
If you have a history of buying and selling properties you may be deemed by the IRD to be a property dealer, in the business of buying and selling properties. This will mean that you are liable to be taxed on any profit from the sale of your properties, regardless of whether the property is your family home or not.
Buying a Rental/ Investment Property
If you buy a property with the intention to operate it as a rental and have no intention of selling it for a profit (capital gain), it is unlikely that you will be liable for tax on the sale of the property. You will, however, be liable to pay tax on any income generated from operating the property as a rental.
Buying a Property with an Intention to Sell
If you are buying a property with the intention to sell it, you will likely be taxed on any profit you realise from the sale, no matter how long you hold the property.
When purchasing a property is is possible to have multiple intentions towards it. You may want to live in it yourself, rent it out as discussed above or you may want to sell it and make a profit from the resale. If reselling the property is one of your intentions when buying, whether your primary intention or not, any profit/ capital gain you reseal will be taxable whenever the sale is made.
Dealers, Developers and Builders
If you are in the business of dealing in land, a builder or a property developer, then income from property in the general course of your business is taxable. However, you may also be liable for tax on property sales outside of your usual business operations within 10 years of purchasing those properties, regardless of whether the purchase of the property was part of your business or not.
If you fall into these categories, you are still entitled to a residential exemption for your family home. However, you can lose this exemption if you have a habit of buying and selling your family home within short periods. As a general rule, if you move your family twice during two years, you may be stripped of your residential exemption and have to pay tax on any capital gain from future sales of your family homes.
Ask for Help
There are a lot of factors that need to be taken into account to assess whether or not you are liable for tax on the sale of a residential property. If you have any questions it is always safer to ask than to simply hope for the best.
Our team of property tax experts can assess your unique situation and will provide you with an assessment that takes into account your circumstances, intentions and outlines your responsibilities in plain English. All for a small fixed fee of just 220+GST. Rest easy knowing exactly where you stand in regards to tax on your property transactions. Get in touch today, call the office on (07) 378 6655.
This advice is general in nature. Every situation is unique and requires tailored advice. MBP has the expertise to guide you and your family through the process of making informed decisions about all of your tax obligations and responsibilities. If you think you may need a some advice and aren't sure how to proceed, talk to our team today by calling 07 378 6655 or email firstname.lastname@example.org