Tax & Property
Tax on Land Transactions
When buying or selling a property, the tax implications also need to be considered. Depending on the situation, there could be both GST and income tax that need to be worked through.
GST – treatment for land transactions Generally, when two GST registered parties enter into a transaction involving land, the transaction will be zero-rated (0% GST).
This applies when the purchaser acquires the land with the intention of using it to make taxable supplies such as running a business from it or leasing it as a commercial building. A key point here is that the land is not intended to be used by the purchaser or a relative as a principal place of residence. Income tax – will you be taxed on any gains?
Under income tax legislation, there is a number of ways that gains made on property can be taxable. For most people, the sale of land will be the sale of a capital asset and should not attract a tax liability. However, where a person carries out a business-like activity relating to land or is associated to a person carrying out such an activity, they may be taxed on any gains.
Some of the more common ways that the sale of property can be taxable are:
- Sale within two years of acquisition. Broadly, under the bright-line rule, if you acquire a property after 1 October 2015 and then sell it within two years, any gain made may be subject to tax.
- Acquired with the intention of sale.
- Dealing in land.
- Developer and dividing land into lots.
- Builder. Any income from being in the business of erecting buildings on land. ☐ Subdivisions and developments.
- Major developments and subdivisions. Any income that has not been treated as taxable above, and is received from the disposal of land which has been an undertaking or scheme that has included development or division into lots.
- Zoning changes and resource consents. If the sale of the land has not been treated as taxable under one of the above, then it may be taxed where a zoning change or resource consent has resulted in an increase in the value of the land.
Selling within 10 years If you sell a property you will be liable for tax if the sale is within 10 years of purchase and you were a property dealer or developer at the time you bought the property. This is regardless of whether the purchase was part of your property business or not.
You will be also be liable for tax if you sell a property within 10 years of building work being completed on the property, AND you were a builder or in the building business at the time you bought the property. This is regardless of whether the purchase was part of your building business or not. If you're associated with a dealer, developer or builder If you're associated with someone in the property industry - you're an 'associated person'.
This means you may have to pay tax on all or some of your property transactions, even if you're not personally a property dealer, developer or builder. The taxation of land transactions is not always straightforward, as the above examples highlight. In some cases, there are additional requirements that need to be met for any gain to be taxable.
To ensure you are fully informed before you buy or sell it is important to discuss property transactions with your advisor in advance.
By Ryan Watt Crowe Horwarth Business Advisor.
If you are currently looking to sell or buy land and would like to discuss any tax implications, please contact Ryan Watt at firstname.lastname@example.org or your local Crowe Horwath advisor. For the contact details of your local office, please visit: www.crowehorwath.co.nz/locations or phone 0800 494 569.