Subdivision tax considerations
Question from kumar updated on 15th May 2017:
I bought my family home in Auckland three years ago. Under the new Unitary Plan I would like to build three houses on the 700 m2 section. My intention is to keep one house for myself and sell the other two properties. Would I be paying tax on the profit I make by selling the other two properties?
Our expert Nick Ashford responded:
There are specific taxing provisions in CB12 and CB13 on tax gains derived from development or division of property within ten years of acquisition. There are also catch all provisions that tax profits from a scheme in the nature of business. In addition CB14 taxes gains where 20% or more of the profit derived is due to a change in zoning.
Some or all of these provisions may apply to tax your gain. There are residential exemptions where land is divided and sold from a family home provided the home is not in a trust. It may be that you could undertake a tax exempt land division project of your home but form a company to acquire the land that will be developed and sold. This may limit the taxable portion to the development profit rather than the gain from subdivision of your home.
Do a careful due diligence first. You may be surprised how little additional profit is made by building the houses - the real gain would be in the land. You will also need to consider GST issues, building the houses will almost certainly constitute a taxable activity requiring you to GST register. There may be no GST claim on the land if you do form a company to buy your land as the associated party nature of the transaction can remove the opportunity to claim GST under the second hand good rules.
It would be sensible to look at all the options and issues here with a tax practitioner.Nick Ashford and the team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.