Property taxation is currently a hot area of focus for the Tax Department. If you’re buying, selling or renting property in New Zealand, it’s important to understand how property taxation works and your responsibilities as a business owner.
Are you in the property business?
The Tax Department is predominantly focused on investment property tax law this year. In particular the buying, selling or renting of residential property for profit.
Every property type is subject to slightly different tax rules. There are four main property types, including:
- Rental property
- Property for sale
- Family home
- Holiday home
Before you buy a property, think about what you are going to use it for. Will you rent it out for profit? Are you likely to hold on to it for a few years and then sell it for a profit? Will you live in it as a family home? Or will you be using it as a holiday home?
What you do with the property, or your ‘purpose’ of acquiring the property, is the main determinate of how it will be taxed. Several other factors will also influence your tax position, including:
- Whether you (or your associate) have bought or sold property in the past (and how often)
- Whether you (or your associate) works in the property business (e.g. builder, dealer, developer)
- Your intention for the property at the time of purchase
Note: If you purchased property or land after October 2015, and sold it within two years of purchase, you will probably be taxed on that profit regardless of property type or purpose due to the two-year bright-line test, introduced in November 2015.
When you rent a property, you will be taxed on the rental income you earn. However, deductible expenses for repairs and maintenance are allowed as well as depreciation. If you make a loss on your rental property, you may be able to offset it against your personal income.
You will also most likely be taxed on any profit you make if you resell. A common misunderstanding is renting a residential property out allows you to claim GST – renting a residential property out is specifically an exempt supply for GST purposes and therefore no GST should be claimed. But again, check your specific circumstances.
Property for sale
Many New Zealanders buy property as an investment, with one of the intentions being selling it in the future once it has increased in value and realised capital gains. If you fall into this group, then you are in the bucket of tax payer that the Tax Department are focusing on. You will be likely to be taxed on the profit you make from the sale.
A family home is the house where you and your family live (you cannot have more than one family home). You should not have to pay tax on the profit from a resale unless you are in the habit of buying and selling homes on a regular basis.
If you have two homes, it gets a bit tricker because only your ‘main’ home should not be taxed, and you are not able to elect which one is your main home. If you family home is owned by a trust, care also needs to be taken in the trust deed to ensure the property qualifies for the home exemption – otherwise the gain may be taxable.
Holidays homes are generally mixed use; they are sometimes occupied by you or your family, and sometimes rented out for profit. If you choose to rent your holiday home, you will have to pay tax on the rental profit. You are able to claim some expenses which include 100% advertising, 0% of private use expenses (storage of a boat not available to renters) and a mix of other expenses depending on how many days you rent it (mortgage interest rates).
Be careful if you rent it out to associated persons at less than market rates. You will also probably have to pay tax on any profit you make when it comes time to sell.
In the spotlight: Subdivisions
Do you own a lifestyle block or a large piece of land that you’re looking to subdivide? You may be required to pay tax on the additional gain. There are a lot of present and historical factors that need to be taken into account.
The new Auckland Unitary Plan has caused a lot of confusion around subdivision tax law. It’s best to consult a tax specialist to help you weigh up the potential costs.