Tax implications of sub-dividing your property

Our Experts Answer:

Ultimately, in a situation such as this, it comes down to what your intention was at the time when you originally purchased the property. If your intention was to own the property long term, then chances are that any gain won't be taxable. If your intention at the time of purchase was to subdivide and sell off, then it will not matter how long you own the property, any gain will be taxable. Whenever you buy a property, especially if it's a buy and hold long term property, it's a good idea to ensure that your intention is well documented at the time of purchase with your accountant and solicitor. A suggestion for you - why don't you just build the second property and not do the subdivision if your main aim is to maximise your rental return? There is no requirement to subdivide as long as you meet the council's requirements for land use. If you rent out the second property, then it is likely that any gain will not be taxable. However, it will, again, come back to your intention at the time of purchase. Although the 10 year rule exists (generally, if you own property for more than 10 years and then sell it, the gain is not taxable), IRD can still assess the sale as taxable because significant expenditure was incurred. There are some exemptions which may apply such that if you sell the property, only the gain on the subdivided section will be taxable.