Who'd have thought reality TV could help shed light on taxation of residential property in New Zealand?

Amidst the ongoing debate around the effects of a capital gains tax on the Auckland property market - with the latest contribution from the deputy governor of the Reserve Bank, Grant Spencer - TV show Our First Home has proven useful.

While New Zealand doesn't have a specific capital gains tax regime, there are provisions within the current law that will tax certain gains made on residential property.

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In a recent episode of Our First Home, contestants bought a property with their own money to renovate and sell. The family that earned the greatest increase in price, by percentage, won an extra $100,000. That's stirred discussion around the tax treatment of the gains made by the families in this show compared with another property based reality show The Block.

The families on Our First Home, as the owners of the houses, clearly purchased the properties intending to sell them; raising the question of whether their gains are taxable.

In contrast, the contestants in The Block were not the owners of the properties they renovated. Any gains made from the sale of these houses go to the TV production company as the owner of the property, and would be taxable as the properties were also purchased with the intention of resale.

So in both cases, the gains are likely to be taxable income of the owner because the main intention in buying the property was to re-sell it. It is this intention that may mean your hard-won gain on the sale of your property can be taxed by the IRD.

BDO Taxation Services Partner Craig Lamberton says whether a gain on sale of a residential property is taxable will depend on the particular facts, and the intention or purpose on purchase.
BDO Taxation Services Partner Craig Lamberton says whether a gain on sale of a residential property is taxable will depend on the particular facts, and the intention or purpose on purchase.

Indeed, even if your 'intention' to re-sell is just one of many reasons you decided to buy the property, that intention can lead to your future gains being taxed.

It's tricky as wording of the tax law in this area is broad and could apply to a lot home owners in New Zealand. It's generally designed to tax those who buy property intending to sell it in the short-term and make a profit - the fact that a property may be sold in the future to realise its value should not create the intention of resale.

However, if one of your intentions is to make a profit all is not lost. An exemption can apply where the owner has been living in the property, or if it is owned by a trust whose beneficiaries live in property as a residence.

Unfortunately, if you establish a pattern of buying and selling houses, then this exclusion is overridden and won't apply.

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The good news is that if you are taxable on the sale of a property, the costs of renovating, together with the cost of purchasing the property - and the agent's fees for selling (including advertising costs) - should be allowed as a deduction reducing the taxable gain.

Ultimately whether a gain on sale of a residential property is taxable will depend on the particular facts, and the intention or purpose on purchase.

The Schreuder Family won TVNZ reality show Our First Home after a series of live auctions.
The Schreuder Family won TVNZ reality show Our First Home after a series of live auctions.

Here are some scenarios highlighting the importance of the owner's intention.

Scenario one

John and Mary purchase a property to live in for the foreseeable future. They do not own any other properties. Over the next year they renovate the house, then Mary gets promoted but the new role is in Singapore. They decide to relocate to Singapore and sell the property.

Any gain that John and Mary make on the sale of their house should not be taxed as it was their main residence and they did not have the intention to sell the property when they purchased it. They sold due to changed circumstances.

Scenario two

Bruce and Gill have decided to help their son Tom onto the property ladder. They buy a house for Tom to live in, renovate and sell once the renovations are complete. Any gain Tom makes, he gets to keep.

As they own the house, intend to sell it from the outset and do not live in it, any gain is potentially taxable income. They have, in effect, "gifted" the profit from the project to their son Tom, though this does not impact their tax treatment as owners.

Scenario three

Emily and Max have just bought their first house which they plan to renovate and then sell to increase their equity and move up the property ladder.

Any gain they make on the sale should not be taxable income for them as they were living in the house and this is the first time they have bought and sold a property. If they repeat the purchase, renovate and sell process they will develop a pattern of activity and future gains are likely to be taxed.

So you see how important that intention at the time of purchase is, and it can change, which is often difficult to prove to Inland Revenue when challenged.

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Craig Lamberton is a Taxation Services Partner with BDO Auckland.