Developer or investor?
(updated on Wednesday, December 19th 2018)
My husband and I own two investment properties in Auckland city and we live with parents. Both our rental properties can be subdivided under the Unitary Plan and these properties are currently under our personal names (no LTC or trust formed). If I go ahead and subdivide any of those properties and build a new house on one of them do I classify myself as developer in terms of tax? Are we going to be affected by any tax system? Is there any better way to minimise tax? My intention is to subdivide, keep all the properties and then rent them out.
Our Experts Answer:
There are two parts to this. In short, you are still a property investor and not a developer. The significance of being a developer (being engaged in a business of property development) is that activity could “taint” other rentals you own. Where you develop a property for rental purposes you are not in the business of property development and this activity will not taint other rentals.
The second aspect is that just because you are not a “developer”, does not mean that any future gain realised on sale of this property will not be taxable. If you subdivide to keep and you hold the resulting lots for a long time, the chances of any gain on sale being taxable reduce but is not eliminated. There are multiple provisions in the Income Tax Act that can apply. There is the five-year bright-line test which is probably not relevant to you but needs to be noted. There is also a nasty provision that can capture gains on the sale of property within 10 years of acquisition where a rezoning or a resource consent issued is responsible for least 20% of the gain realised.
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