There’s no Capital Gains tax on property…is there?

There’s no Capital Gains tax on property…is there?

While there is no capital gains tax per se, there are certainly situations where gains on the sale of property are taxable.

There are a number of activities under the Income Tax Act that could give rise to a tax problem:

1. The Property is bought with the intention of selling it. Intention is the key area of tax law with regard to property. There is no time limit specified between the date of purchase and the date of sale, so no matter how long a piece of land is held, if it was acquired for the purpose of subsequent resale, the eventual sale proceeds are to be included in income. You might think that it would be hard for the IRD to prove this. Case law includes examples where the IRD have requested files from a taxpayer’s bank manager to prove that the taxpayer intended to derive a capital gain on a property by selling it in the future.
2. Someone associated with you is in the building industry and you carry out building work on a rental property. If a member of your close family is a builder or sub-contractor, this may taint you by association.
3. You subdivide a property within 10 years after buying it whether or not there was any intention to do so when you bought it (and the work involved is quite substantial).
4. Council Rezoning – You made a windfall profit on the sale of a property as a result of the Council rezoning the land.
5. Property Development – You are closely related to someone who develops property and you sell property within ten years of acquiring it (whether its the family home or a rental).

Unfortunately for property investors, there is no formula to determine when you have bought or sold enough properties before you are taxed on the profits from any sale. Of course, if you sell property for a loss in any of these situations, you can claim a tax deduction – but the chances of that occurring in the current market seem remote.

The income tax law on the sale of property is complex. We strongly advise you to contact us if you are in the habit of buying or selling lland, commercial property or residential houses. The good news is that the sale of your family home isn’t generally taxable – so long as you don’t make a habit of it.

The IRD have announced that they will be spending increasing time investigating property transactions so if you are uncertain, please get some advice from us.

Angus is the CEO and founder of Generate Accounting.