7 Situations When You Need to Pay Tax on Property Sales
The real estate market is always a hot topic.
One of the most frequently asked questions we receive is whether selling a property is subject to income tax.
This article will provide an in-depth analysis of the situations where property transactions may involve tax obligations. Let’s dive right in.
1. Sales Within the Bright-Line Test Period
The bright-line test applies to residential property sales, excluding farmland, commercial properties, and your primary residences (normally we call it main home).
- If you sell a property within 10 years of purchase, any gains may be taxable.
- If the property was not your main home for a period, gains on its sale may also be taxed.
Bright-Line Test Periods:
- Before 1 October 2015: No bright-line test applied
- 1 October 2015 – 28 March 2018: 2 years
- 29 March 2018 – 26 March 2021: 5 years
- From 27 March 2021 – 30 June 2024: 10 years. Exemption: New builds are subject to a 5-year bright-line test instead of 10 years.
- From 1 July 2024: the bright-line test will apply if a property is sold on or after this date and the sale occurs within 2 years of the bright-line start date.
Rollover Relief:
Effective from 1 April 2022, if a property is transferred (e.g., from personal ownership to a family trust, LTC, or partnership) without a change in ownership for estate planning, the bright-line period continues from the original purchase date.
Key Dates in Bright-Line Testing:
- Start Date: Transfer of title (usually settlement date).
- End Date: The date you sign a binding sale and purchase agreement.
2. Intention or Purpose at Purchase
The bright-line test partly exists to address the intent behind a purchase. It targets speculative buyers, but its subjective nature makes enforcement challenging.
The IRD will evaluate your intentions when purchasing the property, alongside actions and communications. Claiming that you didn’t intend to resell is insufficient.
Key considerations by the IRD include:
- What did your bank or lawyer know?
- Was the mortgage long-term or short-term?
- How long did you hold the property, and why did you sell?
- Patterns in your property transactions.
3. Engaging in Real Estate-Related Business
If you acquire property as part of a business—such as being a dealer, developer, subdivider, or builder—profits from the sale are taxable.
Even if intended as a long-term investment, holding the property for less than 10 years may still trigger tax obligations.
4. Transactions Involving Related Persons
If you’re connected to someone in the property industry, such as a dealer, developer, or builder, your transactions may be taxable even if you’re not directly involved in those industries.
Transactions are taxable if:
- You’re associated to a property dealer or developer at the time of purchase.
- Significant development or construction begins while you’re associated to a builder.
5. Non-Minor Subdivision or Development Within 10 Years
If you initiate a non-minor subdivision or development within 10 years of purchase, profits may be taxable.
Factors defining “minor” vs. “non-minor” development include:
- Time, effort, and financial investment.
- Physical changes to the land (e.g., fencing, lighting, or creating driveways).
6. Large-Scale Subdivision or Development
Significant expenditure on land projects may trigger taxation, regardless of how long the land has been held.
For example:
- Subdividing land into two lots may not be taxable, but dividing it into 20 lots likely will.
- In such cases, you can get a market valuation of the land when development starts. Only the development profit is taxed, not the pre-existing land value.
7. Rezoning
If a property’s value increases by at least 20% due to rezoning under the Resource Management Act 1991, the sale may be taxable if:
- The property is sold within 10 years of purchase.
Exemption:
For each full year of ownership, the taxable income reduces by 10%, provided no other tax provisions apply.
Final Thoughts From Us
Each case is unique, and tax obligations can vary depending on individual circumstances. To ensure compliance and maximize tax benefit, please feel free to contact us for a tailored advice.
