Property problems: Intent determines taxes on property sale profits

Saturday 15 May 2004

Q. I have had a small property in Christchurch for four years. I lived in this property for the first 18 months, then let it through a rental agency while I travelled overseas. I sold the property in January. What taxes will I be liable for on the profit I made on the sale? How do I work out these taxes?

A. No part of the profit made on the sale of a rental property in

By The Landlord

these circumstances is necessarily subject to income tax.

Whether income tax is payable will depend on other facts surrounding your purchase and/or treatment of the property since you bought it.

If you bought the property intending to re-sell it, rather than hold long-term, income tax will be payable on the profit - generally the sale price less purchase price and costs of sale.

A sale four years after purchase does not necessarily indicate that you acquired the property for the purpose or intention of resale. But it is the intention or purpose at the time of acquisition which is relevant to this question and which may be disclosed in contemporary documents - such as bank records if you took out a loan to buy the property. Inland Revenue can gain access to such documents if it wishes to explore the background to a purchase in checking whether the profit is taxable.

Even if you bought the property other than with a resale in mind, the profit on the sale would nevertheless be subject to income tax if, at the time you acquired the property, you or an associated person carried on the business of dealing in land, a business of developing or dividing land into lots, or a business of erecting buildings.

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