Jeremy Tauri: Landlords beware

Revenue Minister Todd McClay

The law has finally been passed requiring landlords to pay tax on any capital gains from investment properties if they are bought and sold within two years.

This finally worked its way through Parliament last week. The rule applies to property bought since October 1.

There are some exceptions, such as the transfer of relationship property or inherited property.

The rhetoric that came from Government was interesting. It was made clear that although there is now a two-year "bright-line" test, and all returns within that timeframe will be taxable, just holding on to property longer than that does not mean you get off scott-free.

The intention test still applies, the IRD has even more power to enforce it.

If you buy a house with the intention of selling it to make money, you have to pay tax on the proceeds no matter how long you hold it for.

Among other changes introduced is the requirement for buyers to have an IRD number. This gives the Government more ability to track sales and ensure property investors keep up with their obligations.

Revenue Minister Todd McClay said the IRD would be watching and would enforce the rules on people who tried to avoid their tax bills, even outside the two-year period.

The department has been given extra money to do this.

If you are an investor, it is really important that you stay on top of your tax obligations. If you buy a property with the intention of doing it up and selling it for capital gains, you will be taxed on this.

If you are a buy-and-hold investor who later decides to sell the property (outside the two-year period), you will not.

It will be interesting how these rules affect the market. Will we see a reduction in turnover as people hold on to properties to avoid the test?

Anyone confused by the rules should contact their accountant to avoid any nasty surprises.