The Simple Guide to Tax on Property Transactions

The following types of transactions are caught within the rules for tax on property capital gains:

• A property purchased with the intention of resale is taxable on sale.

• If the property was purchased for a business relating to land eg as a land dealer, or for a spec building, or for development, the profit will be taxable.

• If the property is purchased by a land dealer or associated person, it will be taxable if sold within 10 years of purchase, except where the property is used as a personal residence or as business premises.  There is no definition of a land dealer, so if there is frequency of buying & selling property, it possible to be caught within this rule.

• If the land is purchased by a developer or an associated person, it will be taxable if sold within 10 years of purchase, except where the property is used as a personal residence or as business premises.

• If the land is purchased by a builder or an associated person, it will be taxable if the land is sold within 10 years of completing improvements to it, except where the property is used as a personal residence or as business premises.  The relevant date in this case is the date that the improvements are undertaken and includes work carried out before purchase.

• If not minor work to develop or subdivide the land is done within 10 years of purchase, whether or not this is as part of a business, then it will be taxable, except where the property is used as a personal residence or for earning rental income or if the new lots are still capable of being used for farming..  This is a tricky little clause, because it doesn’t matter when the property is sold – even if it is sold 50 years after purchasing it.  And it could also catch subdivision of a home or unit titling.

• If a property is subdivided and there are significant costs for things like roading, services earthworks etc then the profit will be taxable except where the property is used as a personal residence or as business premises.  The 10 year rules do not apply but the cost base can be revised upwards, which is important if the land has been held for a long time.

• If the property is sold within 10 years of purchase and at least 20% of the profit is because there has been a change in Resource Management Act or similar, then it will be taxable, except if it is used as a personal residence or for farming.

 And the final trap for young players is that, where the property is owned by a trust, then the exclusions from these rules because the property is used as a personal residence do not apply.  This is because the property is the personal residence of the beneficiaries, not of the owner of the property.

Please note that this is a brief summary of the tax rules and specific advice should be sought for specific transactions.