Property Transactions and IRD
This is still a hot topic for the IRD as it is a productive area for gathering tax revenue, as in most cases the value of the transactions is significant. Property tax matters will always be in the spotlight, but as tax treatment trends come to light the IRD are not afraid to dig further!
We strongly recommend you discuss any potential property purchases or sales with us (before you sign anything) to check out if you are caught in anyway, this includes homes, holiday homes, rental houses, lifestyle blocks, and even commercial, farming and orchard properties.
Here is a sample of a Question we have sorted out recently –
A couple purchase a section for the purposes of constructing a family home 15 January 2017. Construction commences 15 March 2017 and is expected to take about 6 months to complete. During May 2017, the couple mutually agree to part ways, they decide they will complete the build of the home then sell it to free up cash.
Will the Bright-Line test apply, as the property sold within two years? Will the Main Home exemption apply?
Firstly, consideration needs to be given to ensure the standard intention tests do not apply, that the land was not purchased with an intension to sell at a profit, and confirm the tax payer is not tainted by land dealing, development of improvement provisions. If these apply the transaction will attract tax.
If not and the residential property is sold within a 2 year period then the Bright-line test will apply, but does the main home exception apply?
In this situation, they never lived in the property so the main home exception will not apply. For the main home exemption to apply they must have lived on the property for more than half the time they owned it) – therefore the result here is the gain on sale is taxable income.
In the situation of a relationship break down, property is able to be transferred between parties and it will not trigger a tax liability under the Bright-line test, however any subsequent sale of the transferred property may be subject to the Bright-line test.
So how do the tax payers escape a tax liability under the Bright-line test in this situation? Firstly, they could retain the property for more than a two year period, the start of the two year period is the date from which the name goes onto the title for the land transaction. They could consider renting the property to cover the operating costs.
Otherwise they could look to satisfy the main home exception, the main home exception is limited to only being used twice in a two year period. To achieve this, they would need to occupy the property and reside in the house for most of the time owned, now that only needs to be 50.01% to satisfy that test. So they complete the build and move in on the 15 September 2017, if they sold the property after 16 March 2018 they would likely satisfy this test.
There are a number of other matters to consider here, it is not a black and white answer. If you are considering selling a property that has been owned for two years or less and may fall within the Bright-line test please contact us to discuss your circumstances further.