If you’re buying residential property, make sure you know what your tax obligations may be when you come to sell the property. There are various items to consider when buying and/or selling.
- Your history of buying and selling counts (is there a pattern forming?)
- The intention rule (did you buy with a resale intent?)
- The bright-line rules (are you selling within the relevant bright-line period?)
- Resident Land Withholding Tax (RLWT)
- Main home considerations
- If you’re a dealer, developer or builder (or associated to one)
We’ve explained two of these items below, and it is always best to check with your tax advisor, particularly when you consider the large amounts of money involved – better to spend a little up front, than to suffer the consequences in time and money later.
The intention rule
It’s usually your intention on the date that you enter into an agreement to buy a property that matters. Nearly everyone buying a property will sell it at some stage. However, this factor alone is not enough for any profit on disposal to be taxed. In most cases you do not have to pay tax when you sell your main home or if you can show that you bought the property as a long-term rental investment.
You need to think about what your intentions are when you first agree to buy a property. What you intended to do will then likely determine your tax situation when you come to sell. If you buy with a firm intention to resell the property, then you’ll have to pay tax on any profit you make. This is called the ‘intention rule’.
The intention to sell does not need to be the main reason for buying the property – it could be one of a few reasons for buying. For example, if one of your intentions when buying is to renovate the property to increase its value to sell, then even if it is rented for a short period time, you’ll still have to pay income tax when it’s sold.
This intention rule has existed for many years, and while the onus has always rested with the taxpayer to prove what their original purchase intent was, Inland Revenue have perhaps shied away from enforcing this rule more than they needed to. The introduction of the bright-line rules in October 2015, has certainly put the intention test to one side, due to the fairly black and white draconian application of the bright-line test.
The bright-line property rule
If you sell a residential property you have owned for less than 10 years (where first interest in the land post 27th March 2021), then you may have to pay income tax. This is the bright-line rule, and it applies to land owned both within New Zealand, and for New Zealand tax residents, land owned overseas as well.
For bright-line tax purposes, the bright-line period usually commences when the title to the land is registered in your name. The relevant end date to determine whether or not your disposal may fall within the bright-line period, is usually the date you enter into a binding agreement to sell the land.
While the bright-line period is now 10 years, it was originally 2 years when the rules were introduced effective 1st October 2015, and then increased to five years from 29th March 2018. Note in this regard, to determine the correct bright-line period for your land, the rule changes from the normal date of registration of title, to the date you first acquired an interest in the relevant land (usually date of signing a binding agreement). So as an example, if you signed the agreement on 1st March 2018 but settled on 30th April 2018, your first interest in the land was 1st March 2018, and consequently the two year bright-line period applies to the land – not the five year period applying at the date of title registration (settlement date).
While most people automatically think about bright-line when they go to sell, there are actually a number of other land taxing provisions that exist in a designated pecking order prior to bright-line. In this regard you can read more about the ‘Disposal of Land – to be taxed or not to be taxed?’ in Richard’s series here:
- Income tax imposition upon the disposal of land.
- Minor subdivision rule
- Disposal within five years: bright-line test for residential land
- Disposal: amount from land affected by change and not already in income
- Disposal: amount from major development or division and not already in income
- Disposal: those who may be carrying on a business of land dealing, land development and/or subdivision, or of erecting buildings