Last year we purchased a property for a good price - renovated it and sold it for a profit, we then bought a small lifestyle holding and have done extensive renovations and additions to this property, in hope we can make a wee profit and move to taranaki/whanganui and freehold a small bit of land, what I need to know is will we get hit with a tax bill because of this. Its our only home we dont have any other properties.

little_penguins - 2021-11-06 09:00:00

Firstly, this doesn't replace advice from a tax specialist....

The Brightline rule means that you pay tax on any profit made on buying and selling property. There is an exemption for main homes.

You can use the main home exemption twice in a two year period which sounds like you're within that exemption on the existing home.

However, the exemption would not apply if IRD considers that you:

"have a regular pattern of either buying and selling or building and selling your main home"

According to the IRD technical tax guidelines:

"Determining whether there is a regular pattern is a question of fact and degree. Examining transactions that occurred before the disposal of the property in question can help to establish whether the seller has a regular pattern of similar transactions."

So the answer is that you have a regular pattern, so yes you should pay tax on your profit.

sparkychap - 2021-11-06 09:19:00

And as others have said.
If your "intent" was to renovate to sell for a profit, you can fall into paying tax on the profit.

Maybe not on the first sale, but could be on the second, and most likely on a third.
All regardless of the bright line test / main home exemption.

smallwoods - 2021-11-06 09:34:00

*sigh* the Brightline Test replaces "intent" within the Brightline period.

sparkychap - 2021-11-06 09:36:00

so probably better to speak to an Accountant before leaping into this - our next buy is our forever property and main property so we need to get this right :-) thanks for advice

little_penguins - 2021-11-06 10:38:00

little_penguins wrote:

so probably better to speak to an Accountant before leaping into this - our next buy is our forever property and main property so we need to get this right :-) thanks for advice

Agree talk to the accountant first. Also it is a good idea to document your reasons (intent) for selling and buying again if you or accountant thinks you may be queried by IRD. For example, selling because the household size has increased, or moving for a new job or to be closer to elderly parents would be defensible reasons, and can be emailed to the accountant and lawyer at the time. The professionals can also be asked to note this on their file. This demonstrates intent when selling. Defensible but not necessarily agreed by IRD.

Obviously the intent has to be true.

The bright line rules are stupidly complex now and a change of government will see them revert back to the simpler times of 2 years.

artemis - 2021-11-06 12:35:00

sparkychap wrote:

*sigh* the Brightline Test replaces "intent" within the Brightline period.

LOL.

We nearly got caught out buying a property, through the family trust for one of the kids (beneficiary of the trust).
As the trust was going to sell it on, once they had saved the deposit.
Even though they were the tenants and living in it while saving.

Long story short, it got worked out in the end, with little to no grey areas for IRD.

smallwoods - 2021-11-06 13:21:00

smallwoods wrote:

LOL.

We nearly got caught out buying a property, through the family trust for one of the kids (beneficiary of the trust).
As the trust was going to sell it on, once they had saved the deposit.
Even though they were the tenants and living in it while saving.

Long story short, it got worked out in the end, with little to no grey areas for IRD.

I suspect what you are referring to is related to the issue discussed in this Stuff article from yesterday. When Mum and Dad or the Trust takes an ownership stake with a sibling and then sells their stake to that sibling, they become liable for tax on the profit, regardless of their intent. And if they "sell" below market value to try and avoid having made a profit, IRD will use the current market value anyway.

https://www.stuff.co.nz/business/industries/126898222/tax-wa
rning-for-bank-of-mum-and-dad-when-helping-children-onto-the
-property-ladder

sparkychap - 2021-11-07 10:10:00

sparkychap wrote:

I suspect what you are referring to is related to the issue discussed in this Stuff article from yesterday. When Mum and Dad or the Trust takes an ownership stake with a sibling and then sells their stake to that sibling, they become liable for tax on the profit, regardless of their intent. And if they "sell" below market value to try and avoid having made a profit, IRD will use the current market value anyway.

https://www.stuff.co.nz/business/industries/126898222/tax-wa
rning-for-bank-of-mum-and-dad-when-helping-children-onto-the
-property-ladder

There was that and a few other aspects to consider.
Although that article has nothing about "family trusts".
This is why "intent" was looked at.
As we personally weren't putting money into it, or the third trustee.

Not everything is black and white.

But end of, there was no tax paid, etc.

smallwoods - 2021-11-07 12:48:00

We are about to sell a house we have lived in buy mostly rented over the last 11 years ...does the brightline apply to us or is there a time limit?

bergkamp - 2021-11-07 13:35:00

Yes there are time limits but after 11 years ownership should be fine. See the below link, and the decision tool on that page. Note - check the IRD intention test as well just in case.

www.ird.govt.nz/property/buying-and-selling-residential-prop
erty/the-brightline-property-rule

artemis - 2021-11-07 14:54:00

bergkamp, the ten year bright line test has only come in, before that it was 6 year test, maybe some other too, so depends which years it was rented, later or earlier.

msigg - 2021-11-07 14:58:00

smallwoods wrote:

There was that and a few other aspects to consider.
Although that article has nothing about "family trusts".
This is why "intent" was looked at.
As we personally weren't putting money into it, or the third trustee.

Not everything is black and white.

But end of, there was no tax paid, etc.

The concepts in the article apply as much to trusts as to M&D Bank.

When was the property bought?

sparkychap - 2021-11-07 15:17:00

sparkychap wrote:

The concepts in the article apply as much to trusts as to M&D Bank.

When was the property bought?

They have owned it 2 years now, so the trust would have bought it 4 years prior.
Which is before the 10 year BLT, but falls into the 5.

smallwoods - 2021-11-09 08:17:00

smallwoods wrote:

They have owned it 2 years now, so the trust would have bought it 4 years prior.
Which is before the 10 year BLT, but falls into the 5.

if it was bought 6 years ago, the 2 year BLT (yum) would apply.

sparkychap - 2021-11-09 08:41:00

little_penguins wrote:

Last year we purchased a property for a good price - renovated it and sold it for a profit, we then bought a small lifestyle holding and have done extensive renovations and additions to this property, in hope we can make a wee profit and move to taranaki/whanganui and freehold a small bit of land, what I need to know is will we get hit with a tax bill because of this. Its our only home we dont have any other properties.

I would steer away from using the word "profit" in your public postings... profit is a word most often used by businesses.... and the last thing you want to do is portray any hints that you are in the "business" of buying properties doing them up and then selling them.. in the style of a property developer !! Mr IRD can read your posts just as well as anybody else !!

onl_148 - 2021-11-09 11:15:00

sparkychap wrote:

if it was bought 6 years ago, the 2 year BLT (yum) would apply.

Yeah, but it didn't.

smallwoods - 2021-11-09 12:11:00

Another question: what are the tax implications of buying a unit then reselling it without making a profit or even at a small loss?

arfadaily1 - 2021-11-10 21:54:00

arfadaily1 wrote:

Another question: what are the tax implications of buying a unit then reselling it without making a profit or even at a small loss?

If you sold it at below market value and were audited, IRD would take the market value at the time of sale as the disposal price, and you'd be taxed on that.

sparkychap - 2021-11-10 22:05:00

What if you broke even, ie. sold for the same price you bought it for? The reason for the question is we wish to buy the front unit of a 2 unit cross lease, freehold them into two titles but take a small chunk of the other property for us.

arfadaily1 - 2021-11-10 22:21:00

arfadaily1 wrote:

What if you broke even, ie. sold for the same price you bought it for? The reason for the question is we wish to buy the front unit of a 2 unit cross lease, freehold them into two titles but take a small chunk of the other property for us.

So are you taking the costs of freeholding into account when you say "break even"?

sparkychap - 2021-11-11 06:51:00

sparkychap wrote:

If you sold it at below market value and were audited, IRD would take the market value at the time of sale as the disposal price, and you'd be taxed on that.

Didn't sell it "much" below what was deemed "market" value.
No agents fees, as a private transaction, etc.
IRD can't force you to have an auction, to provide true market value, can they?

Market value is a "range" of prices, we chose the lower.

Edited by smallwoods at 7:54 am, Thu 11 Nov

smallwoods - 2021-11-11 07:50:00

sparkychap wrote:

So are you taking the costs of freeholding into account when you say "break even"?

No that would be an extra cost but necessary

arfadaily1 - 2021-11-11 16:27:00

arfadaily1 wrote:

No that would be an extra cost but necessary

Right, thanks, so are you assuming that the resale price would be the same or less because the increased value gained by freeholding the front house would be negated by the loss of land?

sparkychap - 2021-11-11 19:01:00

smallwoods wrote:

Didn't sell it "much" below what was deemed "market" value.
No agents fees, as a private transaction, etc.
IRD can't force you to have an auction, to provide true market value, can they?

Market value is a "range" of prices, we chose the lower.

I wasn't actually talking to you, but since you ask so nicely, market value is normally assessed by way of a Registered Valuation.

sparkychap - 2021-11-11 19:04:00

Basically yes but it ain't happening now as a deal on the property has happened so we've missed out. Thanks for the chat all the same Sparky.

arfadaily1 - 2021-11-11 21:45:00

Registered value by a company is usually slightly lower than what you would expect. And this is correct because most over inflate their property values. Humane nature.

msigg - 2021-11-12 06:54:00

sparkychap wrote:

I wasn't actually talking to you, but since you ask so nicely, market value is normally assessed by way of a Registered Valuation.

Yep, you get 2 valuers and get 2 values!

smallwoods - 2021-11-12 14:16:00

smallwoods wrote:

Yep, you get 2 valuers and get 2 values!

Sure - and sell by different methods and you'd get different sales prices.

sparkychap - 2021-11-12 16:17:00

arfadaily1 wrote:

Basically yes but it ain't happening now as a deal on the property has happened so we've missed out. Thanks for the chat all the same Sparky.

Damn, would have been a nice move, but also can get quite expensive if you need start splitting utilities.

sparkychap - 2021-11-12 16:30:00