New Test for sale of residential property

The Government is in the process of formalising legislation that will tax the profit on sale of residential property if that property is sold within two years of its acquisition.

As with any requirements that apply to sales involving land and property, it is not simple and straight-forward. As a starting point you can assume that if you’ve acquired a property and sell it within two years of its acquisition, there will be taxable income on your gain it is value. Obviously the tax is only on the gain, not on the total proceeds of sale.

If the property is your “main home” it is excepted from this new tax. Main home is a property with a dwelling occupied by you as owner as your main residence. This includes property owned by a trust, although if you’re the settlor of the trust and already have a main home, the trust can’t apply this exception.

Another exception applies to inherited property you’ve acquired. This test won’t apply even if you sell the inherited property within the two year period.

The "dates of acquisition and disposal" will be important to establish around the two year holding period determination. IRD proposes the date of acquisition is when the property is registered for purchase. The date of disposal would be the date when the contract for sale is entered into.

There are anti-avoidance provisions in the test such as limitations on structuring ownership of the property in a company, then selling the shares in the company.

Also bear in mind that if the exclusion on sales of your main home is applied on a series of main home sales, you may yet be caught as a dealer of land anyway. We are happy to discuss your situation and how this test may apply. As with most tax issues a quick chat before you make a commitment may save you thousands of dollars in tax.