A property investment company that has expressed a firm intention to sell its properties at a tax-free profit better check its property tax facts again.
Dunn Housing Funds is offering an "unprecedented" investment vehicle that allows people to buy shares in a company that will invest in up to 10 Auckland houses.
Dunn Funds is seeking $7.5 million to buy 10 Auckland houses. After 11 years, a vote will be held on whether to sell. If 75 per cent of the investors do not back a sale, a vote will be held every year after that until they do.
The forecast 8.4 per cent a year return is heavily reliant on capital gains realised from the sale of property at the end of the 11-year term.
Property commentators and columnists are raising questions about the tax consequences of the sale.
Martin Dunn told media he had a conversation with Finance Minister Bill English some time ago about the implications. "He said 'how long would you keep them for', I said 10 years.
He said 'no problem' ... my lawyer and accountant are adamant it will not be taxable."
Simply renting a property doesn't exclude you from paying tax on a sale. Holding a property for 10 years or more will not exclude you from tax either if you have made it clear that you intend to sell the property. What matters is what you intended to do with the property when you bought it, not how long you hold on to it.
The rules say if you are already deemed a speculator of property then any other property you sell within 10 years may be subject to tax.
An excerpt from an Inland Revenue publication clearly states: "If you buy a property with the firm intention of resale, it doesn't matter how long you hold it - the gain on resale will be taxable (and any loss may be tax-deductible)".