July 11, 2023

Tax Traps in Property Transactions

AUTHOR

Claire Bryant

A significant amount of Kiwi’s wealth is tied up in property. This might be the family home, the bach, a rental, or land.

There are tricky tax traps in property transactions that you need to look out for. In this blog, we provide high-level guidance on the common pitfalls. Every transaction is unique, so don’t hesitate to contact us if you require support with your property transaction.

Intentions when purchasing a property.
Your intentions when purchasing property are crucial in determining the tax position when it comes to a sale. For example, if you approach the bank for a mortgage to fund the purchase and state your intention is to hold for sale, this could prove your intent and, in this case, make a subsequent sale taxable. The Inland Revenue has wide powers; they can request information from your bank, which can usually be found in lending applications.

Sub-divisions and land developments.
Another tricky area is sub-divisions or the development of land. You could have acquired a property with a sizeable amount of land that is able to be subdivided, developed, and sold. Where property is acquired, developed, and then disposed of within a 10-year period, thought needs to be given to whether this could lead to a taxable event, where the work is more than minor. For example, a simple off the plan single lot sub-division could be seen as minor. However, if such subdivision required earthworks, drainage and channelling, this could well shift this into the more than minor category, requiring analysis on taxability.

Tainting provisions
Builders and developers of land need to pay close attention to the potential “tainting” of provisions. For example, property owned by a developer even when it is not part of their business, could be subject to tax if disposed of within 10 years of acquisition or within 10 years of development. There are also very strict associate persons rules that prevent builders and developers from structuring their affairs to circumvent a tax outcome. Anyone who is a builder or developer should pay very close attention to these provisions and seek expert tax advice before undertaking property transactions for themselves.

The bright-line test
Finally, there is the bright-line tax to contend with. The tax applies to a property that is not the main home and is disposed of within a 5 year or 10 year period, depending on which bright-line test applies. The main home exemptions generally require a person to live in the property as their main residence, with minimal allowances on time being spent away from the property. There are also rollover relief provisions, e.g., disposal due to a relationship property settlement. The rules can be complex, so it is important to seek professional advice if you have concerns about whether your disposal could be caught under the bright-line test.

We have a team of dedicated experts in property tax matters and can point you in the right direction to ensure the best tax outcome for your situation. Talk to us early and always before you undertake a transaction to ensure the best outcome possible.

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Every transaction is unique, so don’t hesitate to contact us if you require support with your property transaction.