Property problems: Tax law on property transactions complex

Q. Last October, the IRD warned investors to check out the tax implications before buying real estate property purely to sell it on for a quick profit. I realise that if I buy property which I hope to resell at a profit in the short term, the profit will be taxable.

What if I buy one or more properties for long-term rental purposes and occasionally buy a property for a quick sale? Will I be taxable on any (capital) gain on the eventual resale of any of the long-term rental properties?

A. As the IRD's October media release states, the tax law on property transactions is complex and people need to seek professional advice.

At its simplest, where real property is bought to resell, any profit realised on sale is subject to tax.

Conversely, if such a property is sold at a loss, that loss is deductible (although documentary evidence that the property was bought for the purpose or intention of resale may be required to support the deduction). Incidentally, this is also the case if it is personal property, not land which is bought and sold.

Even if a particular piece of land was not purchased for resale but for a long-term hold (say, to rent), and the property is resold within 10 years, any gain on the sale (over cost) may be taxed.

The gain will be taxed if at the time the property was acquired, you or an associated person carried on either a business of dealing in land, a business of developing or dividing land into lots, or a business of erecting buildings.

Therefore, to answer your question, if you or an associate buy property for resale so as to be carrying on a business of land dealing (for instance), then any profit you make on the sale of other property acquired subsequently, whether as part of that business or for long-term hold, will also be subject to tax if that property is sold within 10 years of acquisition.

So consequently, to some extent New Zealand already has a capital gains tax.

A person's associates in this context include any company in which the person has at least a 25 per cent voting interest, any partnership of which the person is a partner, and any relative of the person.

A person's relatives are those connected by blood relationship, marriage or adoption.

Persons are connected by blood relationship if within the fourth degree of relationship.

Identifying those relatives within the fourth degree can be done by following a procedure of counting the steps back to a common ancestor and then the steps forward to the other person.

If there are no more than four such steps, the persons are treated as within the fourth degree of relationship and therefore as relatives.

Persons are connected by marriage if one is married to the other or to a person who is connected by blood relationship to the other (eg, a person's in-laws are relatives).

Persons are connected by adoption if one has been adopted as the child of the other, or as the child of another person who is within the third degree of relationship. If a person's relative has benefited or is eligible to benefit under a trust, then the trustee of that trust is also a relative of that first person.

Two companies are also associates where there is a group of persons who have at least a 50 per cent voting interest in each company, or have control of both companies by any other means.

Consequently, if you intend to hold property long-term, care needs to be taken that your other property activities, or those of an associate, will not bring any gain on an eventual sale of your long-term hold within the tax net.

Professional advice is therefore crucial at an early stage.

Advice should also be obtained before property is acquired, whether as a short- or long-term investment, because profits from the sale of land can also be taxed in other circumstances (subject to certain limited exemptions).

First, tax will be payable where land is sold within 10 years of acquisition and at least 20 per cent of the profit is due to rezoning factors.

Second, profits from a land sale may be taxable where an undertaking or scheme involving development or subdivision of the land commenced within 10 years of acquisition.

Third, profits from major projects on land involving significant expenditure on earthworks etc are taxable if commenced more than 10 years after acquisition of the land.

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