In general terms, you must account for income tax on the sale of any property if either of the following applies (assuming you're not in a land related business):
· At the time of purchase you intended to resell the property.
· Even if you did not have the resale intention at the time of buying the property, if the property is sold within 10 years and either you or an associate are or were involved with construction work, land development, land dealing or subdivision, income tax is likely to be an issue.
If you try to disguise the ownership of a property in order to avoid tax, this will take you out of the category of tax avoidance into tax evasion.
Many people buy property intending to resell. In cases where people buy hoping to obtain a capital gain from a rising property market, or they do up a property with the intention of flicking it off, the property transaction must be declared. Whether or not you live in the property is irrelevant.
Sometimes people’s intentions at the time of buying a property can be difficult to prove. You may say one thing – the IRD may say something else. The IRD can access all kinds of information to try to prove that you bought with the intention of resale – for example: file notes that your bank manager made when you applied for your mortgage, whether you made long term connections with the neighbourhood, and your history. If for example, you have bought and sold a number of properties that you intended to be your long term family home, but for various reasons the properties weren’t satisfactory, this pattern may appear suspicious to the IRD.
The IRD monitors a large number of properties and it has a focus on property transactions. Many transactions have not been properly declared, either because taxpayers have not understood that tax was an issue, or because of a decision to see if they can get away with it. Because property transaction information is available indefinitely, if you have failed to declare, it may be only a matter of time before the IRD comes calling.
The best time to declare your property transaction to the IRD is in the income year that it happened. This is best not only because it is the law, but because this is when you are most likely to have the cash flow to pay any tax due, and because it prevents interest and penalties becoming an issue. The next best time to declare your property transaction is now. By making a voluntary disclosure you can significantly reduce the penalties that may apply. In conjunction with the voluntary disclosure, negotiations can occur in regard to a repayment arrangement and/or for the reduction in penalties and interest.
Other tax property issues include: GST on apartment sales, and changes to the use of a rental property (for example, the landlord moves into the rental). The law relating to property tax is complex and your liability for tax can arise, or change, as a result of small changes in your situation. Getting proper advice is essential. Even if it just allows you to sleep at night, it is money well spent.