If you profit from property, chances are you will have to pay tax. Tax related to a sale of property can be complex, so if you’re in doubt you should seek the advice of a taxation professional.
Thinking about your property investment strategy is a good start when it comes to understanding your tax obligations.
Will I have to pay tax?
The short answer is: it depends, and it can be different for each individual property that you own.
Whether or not you need to pay tax is mainly determined by:
Your intention when you buy the property
The patterns of your previous property transactions
Your association to a builder, property dealer or developer
Your actual use of the property
The bright-line test for residential property.
Below are some types of property investor, and general guidelines for property sales. In all cases it’s a good idea to speak to a tax advisor.
A speculator buys a property intending to sell it for financial gain, and any rental income is secondary. The property is considered ‘stock’ so any profit from selling it is taxable. If you follow a ‘buy and sell’ strategy you're most likely a property speculator for tax purposes and GST could be applicable.
A dealer (or trader) is like a speculator, but they buy and sell on a regular basis. GST will almost certainly need to be paid.
A rental property investor (“buy and hold strategy”) buys a property to generate ongoing rental income and with no definite plans to resell it. As the property is a capital asset, any profit or loss from selling it is generally not taxable, unless the bright-line test applies (see below).
Your tax obligations can also change if you develop a “buy and sell” pattern, or you have an association with builders, dealers or developers.
An owner/occupier buys a house to live in it, with no intention of renting it or selling it for a profit.
But if things change and you do sell it, there may still be tax implications – see the bright-line test below.
The bright-line test
If you bought a property on or after 1 October 2015 and sell it within two years, you may have to pay tax on any profit. This could be regardless of your original intention when buying the property.
However some exemptions apply, such as if it’s your main or matrimonial home, or an inherited property.
It’s worth bearing in mind that any property bought or sold overseas is also covered by this test.
It pays to check
Knowing more about your tax obligations could help you make better decisions. Obviously you want to get it right from the start.
Understanding your obligations can help you avoid an unexpected tax debt. So, before you buy or sell a property you should definitely check if you have to pay tax.
Buying or selling property?
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