Tax on subdivision?

Question from Donna updated on 7th August 2013:

I purchased a property ten years ago as a family home. Four years ago we outgrew the property and given it had large section we built a new family home (second dwelling) on the rear of the property. We have been renting out the front property (existing house) for the last four years while living in the new family home. We have now outgrown the new family home and would like to place the properties on two titles (subdivide) so we can sell the houses and buy a larger family home. Can you please advise what the tax implications on this would be? The land was originally purchased to live in as a family home and the second dwelling was erected to live in as a family home. Will I have to pay tax when I subdivide and sell either property?

Our expert Mark Withers responded:

Section CB12 taxes gains derived from the subdivision or development of land within ten years of acquisition where the work involved was more than minor. There are exemptions from the taxing provisions where the subdivision was done to enable the taxpayer to live on the land or to derive rental income from the land. There is also an exemption where the land being subdivided is the residence of the taxpayer provided the land is less than 4500sqm in size. This exemption does not cover land held by trusts though. Interestingly, a recent commentary from IRD dealing with this section also suggests that it is only the land included in the "scheme of division" that is referred to in CB12. The implication of this is that if one section is sold and one is retained the sold section is not taxed under this section because the land involved in the scheme of division has not itself been divided. This commentary, whilst representing the view of the revenue is not yet able to be relied on by taxpayers. The subdivision of land and the associated tax consequences are complex and it is recommended you seek a tax opinion covering your specifics before forming a view on the likely tax outcomes.

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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