New Zealand: Will you have a tax bill for capital gains on land sales?
A new tax test on the sale of residential properties is coming – the bright line test.
If you buy and then sell a residential property within two years new taxation rules may apply to the gain (or loss) that you make. Existing tax law provides for tax on sales where the property was purchased with the intention of resale (“Intention rule”). The new “bright line” test tightens the rules for some sales within two years.
The new rules will come into force on 1st October 2015. The legislation making the changes is still being finalised but the following is expected:
1. The test will apply to residential land; so sales of business or farm land remain subject only to the intention rule.
2. Income tax will be payable on the capital gain made when a residential property is on sold within two years, despite there not being an intention to resell at the time of purchase. Any loss is only able to be offset again other land sale income.
3. Exceptions are:
a. Main home – gains made on the sale of your primary residence are exempt. There are additional rules if the main home is owned by a Trust and the Trust will need an IRD number.
b. Inherited property – property transferred following a death is expected to be exempt
c. Relationship property – property transferred following a relationship break down to one of the parties is expected to be exempt. However the on sale by that person may be caught by the two year test.
4. Deductions – the costs of on selling the property (for example real estate and legal fees) are able to offset against gains.
5. Anti-avoidance rules will catch sales through companies or trusts by way of share sales or distributions to beneficiaries
An IRD number will be needed for every sale of land (whether or not the sale is within two years of purchase.) For people who are tax resident outside New Zealand the equivalent number from their country of residence will be needed. The final rules will need to be considered in the context of a specific sale and along with specialised tax advice.
