You have just sold a property. Have you checked to see if there are any tax implications? Even the sale of your private home could be taxable in some cases. I
If you are planning to buy or sell a property, we recommend you talk to your tax advisor before you take action. Properties are ‘big ticket’ items and if you are not aware of all the ins and outs, you could run a significant financial risk.
There is a lot of general information about properties and tax on our website ( www.ird.govt.nz). Please refer to the following guides – Tax and your property transactions (IR361); Buying and selling residential property (IR313)
A common question
I have bought and resold a property at a profit. Do I have to pay tax?
Answer: Refer IR314.
All our guides are found under ‘Forms and guides’ on the right-hand margin of the homepage.
Our property decision tree can indicate whether you have a tax liability when you sell a property. You can access the decision tree by clicking through the path “Businesses and employers, residential property, buying property and why your reasons for buying a property are important.
As an overview, to determine if a property sale is taxable you need to ask yourself three questions:
What was my intention when I bought the property?
What is my history of buying and selling properties?
I am a builder, developer, or property dealer, or associated with any of these people?
The intention test
In general, if you buy a property solely as an investment to earn rental income, and you have no plans to resell the property, any profit on sale will be a capital gain, which is not taxable. You will not be able to claim a deduction if you make a loss.
On the other hand, if you buy the property with the firm intention of selling it when prices rise, you must pay income tax on your profit. A loss on sale is likely to be deductible. This rule applies even if you have owned the property for a sometime or you have rented it out, waiting for the right time to sell.
It is important to note that you may have to pay tax even if you only sell one property – the deciding factor is your intention at the time of purchase.
Property dealers
People who have established a regular pattern of buying and selling properties may fall into the category of ‘property dealers’. If you are a property dealer, you must pay income tax on your profits. Any losses on sale will be deductible.
If you are a property owner and you or an associate dealing in land, building and construction work, or in subdividing or developing land, you may be subject to special tax rules. For example, the period of ownership becomes an important consideration for tax purposes.
If you or another person associated are undertaking (a) sell any property that is part of the assets of the activity, or (b) sell any other property (which is not part of the activity) within 10 years of buying it or (c) completing improvements to it should know that any profit accrued might be taxable.
There are some exceptions: the sale of your private home or business premises will not normally be taxable under these rules.
An example
Trent started buying and selling residential houses in 2004. By the end of 2004, he had established a regular pattern of buying and selling and was a dealer for tax purposes.
Trent co-owns Trent Rentals Ltd, a company that buys residential rental investment properties. In January 2006, the company buys a rental property to hold and rent. In December 2010, rentals in the area are falling and the company sells the property. Income tax would not normally be due on the profits from the sale, because the company bought the property as an investment. But, because Trent Rentals Ltd is associated with Trent, who established himself as a dealer before this property was bought, and it was sold within 10 years, Trent Rentals Ltd must pay tax on the sale regardless of the company’s original intention to hold the property as a rental investment.
Private homes
Buying and selling your private (family) home usually has no tax consequences.
However, some people buy a family home intending to resell it, and they may do this regularly as a way of earning income. If you have a regular pattern of buying and selling your family home, you may have to pay income tax on your profits.
Tax return
Any rental income you earn is taxable, and expenses related to earning that income are deductible.
If you sell a rental property for more than its book value, the depreciation recovered becomes taxable income.
Do you need to pay income tax on your profit from a property sale? The sale price is returned as income in your tax return, and you deduct the purchase price in the same annual return. Losses are also calculated similarly.
GST return
If you receive rent from a commercial property, you need to include the rental income in your GST return. You can claim GST credits for some of the expenses related to earning that income.
When a property is part of your taxable activity, you may be able to claim GST credit when you purchase the property. When you sell, you may be required to include GST in the sale price and pay the GST to Inland Revenue.
Rent received from a residential property is exempt from GST. As such, you cannot claim GST credits for any expenses related to this source of income.
Free workshops
If you are in business, you may like to attend one of our free tax seminars or workshops held in various parts of the country.
Visit www.ird.govt.nz and enter the search term ‘Seminars.’
Abdul Rafik is Inland Revenue’s Community Relationships Advisor based in Auckland. He is happy to answer readers’ queries, which should be sent to venkat@indiannewslink.co.nz
