Intentions and tax

Question from Stephen updated on 31st May 2019:

I'm a building contractor doing mostly renovations/extension work.For the last 10-11 years I have been purchasing properties in Masterton, with the intention of keeping them long term for renting. I've gradually purchased six and then gradually built another rental on the rear of five of them.

The IRD website emphasises "intention when purchasing" is the important factor on whether we pay tax when selling a property. My intention has been to keep them to provide extra financial security in our retirement. However, I've been approached by a lady wanting to purchase one of my properties as she has a sentimental attachment - her father built or extensively renovated it years ago.

I bought it 10 years ago. I've not done anything to it as yet other than maintenance. But this has forced me to consider my options wisely as I'm now a young 70 years old. So I'm trying to establish will IRD regard me as a property developer and charge me tax or does a long term landlord get exemption?

Our expert Matthew Gilligan responded:

Based on the information you have provided me, you would not be regarded as being a property developer. A property developer, as far as income tax law is concerned, is somebody who is in the business of developing property for sale. From on the information you have provided, you have not engaged in such a business.

It is important to note that being in the business of property development is not the only avenue the IRD have to claim that gains realised on sale are taxable. In fact, there are 10 provisions of the Income Tax Act that can capture gains on selling property. In this instance though, given the length of time you have held the property for, the fact is that this supports an intention to hold the property long term at the point of acquisition.

The other surrounding facts, suggest to me that you are unlikely to face a tax liability. Without delving further into your circumstances I cannot give a definitive answer, but it appears to me at least on the face of it that your sale of this property that you have owned for 10 years would be a non-taxable sale. I recommend you get formal advice, though, to confirm that before taking a tax position.

Matthew heads GRA's specialist property and asset planning division. He helps clients create optimal tax structures and build wealth through property. He has an extensive buy-to-hold property portfolio, is currently involved in over a dozen developments, and is author of two books - Property 101 and Tax Structures 101.

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