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Question from Heather updated on 27th April 2013:

We have owned a three-bedroom home since 2006. We lived in it for 18 months before moving out to something bigger. We then changed the house to a LAQC and rented it out. We have now moved back in for two months to renovate the house and sell it. We haven't done anything to change the ownership stucture but have considered putting it in a LTC. I know we don't have capital gains tax right now in New Zealand unless you are developing or trading properties. I just want to check if there is anything in particular we should be doing to ensure the IRD doesn't consider the sale of our house as intentional short term sale for profit and require us to pay tax. We origionally intended to keep the house for 10 to 20 years as a longterm rental. However, we have an opportunity to develop our business right now and want to use the profit of the sale of this house to fund our business development. We don't own any other property and will look to buy a family home in 12 to 24 months time. Thanks for your advice.

Our expert Mark Withers responded:

If I'm following you correctly the property is already an a LAQC, this means you will already have defaulted to QC or alternatively elected to become a LTC. Be that as it may the tax outcome on sale of the property would normally be dictated by the intention at the point of acquisition. Where the property has been held for only a short period there is a greater likelihood that the revenue may choose to challenge you on whether an intention to onsell existed at the point of acquisition. Having evidence to prove your intention at acquisition is vital if these arguments do develop. Company resolutions, fixed rate loan agreements, lettters or emails to accountants, bankers and lawyers are all good evidence. To a lesser extent, your current reasons for sale can be relevant also particulaly if they did not exist when the property was acquired. Be careful to ensure you claim no deductions for the time you are residing in the property. The IRD take a dim view of shareholders residing in their LAQC or LTC properties. Make sure you declare your depreciation recovery on sale assuming you do achieve a gain.

Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.

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