On 17 May 2015 the Government announced a new bright-line test with the purpose of taxing gains made from residential property sold within 2 years of purchase. The test will be subject to three exemptions – where the property is:
- the “main home”;
- sold after it was inherited; or
- transferred as part of a relationship property settlement.
The relevant bill is not expected until August. However, a paper has been released by the IRD and Treasury (who carry some weight) with suggestions on how this test should be designed. A summary of some of those suggestions follows:
- The test only applies where the purchase agreement is entered into after 1 October 2015;
- The test supplements the “intention test” (i.e. you can still be taxed if you bought with the intention of resale irrespective of how long you hold the property);
- The 2 year period is calculated from the date the purchase is registered with LINZ to the date a sale contract is entered into.
- “Residential land” means land that has a dwelling on it; or land for which there is an arrangement to build a dwelling.It does not include land used predominantly as a business or as farmland.
- There can be only one “main home”.It must have a dwelling on it, be occupied mainly as a residence by the owner and be the main home of the owner.
- If owned by a trust, the main home exemption can apply if a beneficiary lives there (unless the settlor has another “main home”).
- Deductions:Capital costs (including improvements) should be deductible in the income year the property is sold.Holding costs (e.g.interest/rates) should sometimes be deductible in the year they are incurred (as per current rules).
- Losses from property sales to be allowed but ring-fenced (i.e. can only be off-set against income earned from other property sales and not general income).
While the detail is still not settled on, it is clear you can expect to be taxed on any gains made from the sale of a rental property if you enter into an agreement to buy that property after 1 October 2015 and then sell it within 2 years of purchase. Your intention at the time of buying and your reasons for selling will not alter that situation. However, there may also be consequences for properties that are not standard rentals/investments (e.g. holiday homes / homes in trusts set up by parents etc.). As always, the devil will be in the detail.