Sold! But will my property profit be taxed?

Buying and selling property has generated substantial income for many New Zealanders – especially in today’s booming housing market.

If you buy residential property with the intention of selling and making a profit, that profit has always been taxable.

But the Government has now added another layer to this subjective test of intention known as the ‘bright-line’ test.

After 1 October 2015, anyone who buys residential property and sells it again within two years will have to pay tax on any capital gains.

Residential property is defined as land that has a dwelling on it, or where plans exist to build a dwelling. It does not include land used mainly for business purposes, farmland, rest homes or retirement villages.

There are 3 exceptions to this ‘bright-line’ rule

Main home – the one property you use as your main residence and have the ‘greatest connection with’ will not be subject to tax. A well-established legal test based on case law exists to determine a person’s permanent place of abode.

Inheritance – if you inherit the property following a death and you decide to sell within two years of receiving it, you will not pay tax.

Relationship property settlement – if you receive the property under the terms of an agreement with your ex-spouse or partner, it will also be exempt.

How will tax be collected?

After 1 October 2015, lawyers and conveyancers must enter a purchaser’s IRD number into Landonline when completing a property transaction and transferring the title.

Landonline will then report that information to the IRD who will issue a tax notice if required. The information will also be made available to overseas tax authorities.

Get your IRD number ready

Everyone who buys property must now have an IRD number – including family trusts (who didn’t previously need one). Buyers who live offshore will need to provide evidence of a New Zealand bank account to obtain an IRD number.

Without an IRD number your lawyer will be unable to finalise your land transfer. You will be unable to settle the sale and purchase agreement and may incur penalties.

If you don’t have an IRD number, apply for one online today at www.ird.govt.nz

The information contained here is of a general nature and should be used as a guide only. Any reference to law and legislation is to New Zealand law and legislation. We recommend that before acting on it, you consult your lawyer.