If you bought land with the intention to sell, expect to pay tax on the profits. It doesn’t matter how long you own the property prior to sale, the intention test overrides other land taxing provisions including the bright-line test for residential land. There are, however, exclusions for the family home and for business premises.
A two year bright-line test was introduced by the Government for residential land purchased on or after 1 October 2015. The two year test was extended to five years on 29 March 2018. Essentially, where residential land is sold within the bright-line period, profits on sale are taxable. Exclusions are provided for the taxpayer’s main home and for inheritances.
The ‘bright-line period’ generally starts when title to the property has been transferred to the taxpayer, and ends when a contract to sell the property has been entered into.
If you are contemplating selling a residential investment property either to a third party, or as part of a restructure of your affairs, please contact us to discuss potential bright-line issues before a sale takes place.
Where land is purchased by someone who was a dealer, property developer or by an associated person at the time the land was purchased, and it was purchased for the purpose of the business of dealing or property development, the proceeds of sale will be taxable regardless of the number of years for which the land has been owned. Where the land was not purchased for the business, the proceeds of sale will be taxable only where the land is sold within ten years of the date of purchase.
Family home and business premises exclusions are provided for.
Where land is purchased by a builder, or by an associated person, the tax implications depend upon whether the land was purchased for the purpose of the builder’s business of erecting buildings.
If the land was purchased as part of the business of erecting buildings, and improvements were made to the land, the sale of the land will be taxable. The sale proceeds will be taxable no matter how long the land is owned.
Where the land was purchased other than for the business of erecting buildings, for example, as residential investment property, then the sale proceeds will be taxable if the builder makes improvements to the land and sells the property within 10 years of doing the improvements.
There are exclusions for the family home and the builder’s business premises.
The sale of a taxpayer’s family home and business premises are exempt from tax in relation to the provisions of the Income Tax Act 2007 dealing with: buying with intention to sell, dealers, developers and builders, EXCEPT where a regular pattern of such transactions has emerged. If in doubt, talk to us before you sell.
If you commence a scheme of development or subdivision within 10 years of purchasing the land, and the work is considered to be “not minor”, then taxable income will arise when you sell the land. An element of judgement is involved in determining whether the work is “not minor” and the IRD have their own views on this.
Exclusions are provided for the family home, business premises, farm land and investment properties.
We recommend seeking professional advice for interpretation of the rules and how they may apply to your situation.
If you commence a scheme of development or subdivision after 10 years from the date you purchased the land, then taxable income will arise when you sell the land. The scheme must involve significant earthworks, contouring, levelling, drainage, roading, kerbing, channelling, services or work customarily undertaken in major projects involving the development of land for commercial, industrial or residential purposes.
Profits are taxable only to the extent to which they are derived from the development or subdivision undertaking or scheme, as the value of the land at the date of the commencement of the scheme is allowed as a deduction.
Whether or not the total amount of the relevant expenditure is “significant” will be a matter of fact and may vary from case to case. Nothing is black or white unfortunately.
Exclusions are provided for the family home, business premises, investment land and farm land.
Taxable income includes profits from land sold within ten years of purchase, where at least 20% of the profits were due to rezoning. These profits are only taxable if not already taxed under previous land taxing provisions.
Exclusions are provided for the family home and for land acquired for farming or agricultural business purposes.
Tax relief from profits is allowed for the greater of an amount of $1,000 or of 10% of the profit for every complete year the land was held.
Tax issues surrounding land transactions are extremely complex and not for the faint-hearted. There can be some big dollars involved which is why we recommend seeking tax advice before entering into any land transactions. The above is only a very brief summary of tax issues that may arise. In addition to income tax, GST also needs to be considered, and it is not necessarily synchronised with income tax ie. You can have one without the other and vice versa. Every situation is different and accordingly we recommend giving us a call to discuss your particular situation.
Disclaimer: This article is of a general nature only. Please obtain specific advice on your particular situation as minor changes in facts may result in significantly different outcomes.