Finance: Easy to step in tax trap

By Jeremy Tauri


There's been a lot of talk lately about capital gains from property. People buying houses, doing them up and selling them on - a bit like the couples whose houses sold for nearly a million on The Block last week, when they were bought for $750,000.

But it's not that straightforward and profit from property is definitely not tax-free.

The IRD is cracking down on transactions of properties bought with the intention of selling them for profit.

A recent compliance focus document for 2012/2013 released by the IRD indicated that it will be working with the industry and professionals in this area using a "targeted monitoring system" to find those property traders who are trying to avoid paying tax on profits, claiming they are capital gains.

In my experience, people just aren't aware of what the tax law around property is and are sometimes caught out after the transaction has been done. Get advice if you are delving into property.

First up, what are your intentions? If you're aiming to make a buck, how you make that buck counts.

Are you purchasing a property to collect rent? Or are you purchasing the property with the intention to sell at a profit?

Each is taxed differently.

Capital gains are generally tax-free in New Zealand but if you have purchased a property with the intention to sell then you will be taxed on the profit.

Keep tabs on notes that you might scribble or lending document notes as these can be used to establish intention. The IRD has been known to contact bank managers to discuss borrowers' intentions.

If you have purchased your property as a rental then you pay tax or claim losses on rent received, less your expenses. For a rental property, a sale that realises a capital gain (sale for more than your cost) will be tax-free, a capital loss (sale for less than the purchase price) will not be deductible.

If you are associated with a land developer, builder or someone who is in the business of buying and selling property, then you may be caught in the tax trap as well. The IRD are looking into ownership structures purposefully created to dissociate a transaction from a developer.

Thinking of subdividing? Generally, if you've owned the land for more than 10 years and it's work of a minor nature (ie, no earthworks, just some boundary pegs ) then it's not taxable. Get a digger, spend a bit of dough and then it can become a taxable affair. There are some exemptions that can be complicated - these need to be reviewed on a case by case basis.

- Hamilton News

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