It is understood that the parents of the child were not present at the address.
"It is very early into the investigation and I am not prepared to speculate on how the boy died," Detective Senior Sergeant Lew Warner said.
"We have a number of people we need to speak to and the investigation will also rely heavily on information and advice from medical experts; so it may be some days before we are in a position to make more informed comment."
Police would not comment on the nature of the injuries.
A neighbour said the first she knew something was wrong was when she arrived home yesterday and an ambulance was outside.
She said it was only this morning that she heard about the death on the internet.
The neighbour, who did not want to be named, said the woman living at the address seemed "lovely" but was a very private person.
The dead child had at least one older sibling who attended the nearby school.
A staff member turned up at the address looking visibly upset.
Other children from the address are currently in the care of CYFs pending the outcome of the investigation.
An email was sent to Taupo District Councillors this morning advising them of the investigation.
Mayor David Trewavas said he had also had a briefing with police about the incident.
"This is obviously very devastating for everyone, for the whole community. It's a sad, sad day in Taupo today.
"This was a reasonably good area in town, in close proximity of a very good school... it would be devastating for the neighbours as well," Mr Trewavas said.
"The New Zealand police informed me straight away and obviously an investigation is now taking place but we're all feeling very flat at the moment."
Councillor Anna Park was also shocked by the news.
"As a parent, I have two 10-year-olds and a 3-year-old so this is heartbreaking, it really is," Mrs Park said.
"We have an amazing network of social services in this area and I'm sure they are rallying together to offer support. As a parent, particularly of a child the same age, this is beyond comprehension really."
The name of the boy will not be released until all relevant next of kin have been informed, Mr Warner said.