Tax and Property Sales
A new consideration for many clients when they are considering selling their property is “ Will I have to pay tax?”
For some people having to pay tax on the sale of property is not a new thing. Property developers and those who purchase property with the intention of selling for profit have been liable for tax on any gains for some time.
The problem for the IRD has been finding out about these transactions and proving that the intention when buying the property was to on-sell it. As more foreign buyers have entered the market the concern is how can IRD ensure foreign sellers pay the tax that might be due?
The new property tax package is designed to solve these problems by capturing information about who is buying and selling, imposing an objective two-year test for determining whether tax is due on a sale and ensuring foreign sellers pay tax due on capital gains when they sell.
Who is required to pay tax?
If you purchase a property after 1 October 2015 and sell it within two years of purchasing you will be liable to pay tax on the gains made unless you fall into an exception. Exceptions include: your main home, relationship property transfers and inherited property.
If you are not a foreign owner you are required to declare the gain in the usual way in your tax return and pay the tax yourself. If you are defined as an “offshore Resident Land Withholding Tax person” then your lawyer is required to pay the tax out of the sale proceeds. For companies and trusts, it will depend on whether directors shareholders trustees and beneficiaries are defined as RLWT persons. This means, for example, that a trust may be treated as a foreigner if a beneficiary is living overseas.
What will be the impact of these changes?
Most people won’t be required to pay the tax. The family home will be exempted and it won’t be too hard to hold onto property for 2 years to avoid the tax.
However, there will be some who will be caught by the new tax rules because they are forced to sell. Families who are forced to change cities due to job promotions or forced to sell a rental property because of a relationship break down would be caught.
Young couples who can’t afford to buy homes in a main centre could be caught if they purchase a home elsewhere which is not their main home and then need to sell it to release equity for their own home purchase.
If you are considering buying a home for your child to help them to get into the market and you intend to transfer ownership to them you will need to ensure you wait two years in order to ensure you are not caught by the tax requirements.
If your trust has made a distribution to an adult child who is living overseas to pay off a student loan or if a trustee is living overseas the trust could be classified as an offshore RLWT entity and required to pay tax upfront on a sale. Companies with overseas directors can also be caught.
You can’t claim more than one main home. If you have more than one house your main home is the dwelling mainly used as your residence and to which you have most connection. So you or your trust could be liable for tax on the sale of the bach.
Prior to buying or selling a property which is not your main home or which is owned by a trust or company we recommend you contact us and your accountant for advice to ensure you are aware of the consequences of the new tax regime.