When Is the Sale of Land Taxable?
One of the questions I am regularly asked is whether the profit from selling a property will be taxable.
The answer is not always straightforward.
There is a common perception that if you buy a property as an investment and hold it for a number of years, any eventual capital gain will automatically be tax-free. That is not necessarily the case.
New Zealand’s land-sale rules are quite broad. Whether a sale is taxable can depend on why the land was acquired, what you subsequently did with it, who you were associated with and, in some circumstances, how the value of the land changed while you owned it.
The bright-line test is only one part of the picture.
Land acquired with the intention or purpose of resale – Section CB 6
The starting point is often section CB 6 of the Income Tax Act 2007.
If, when you acquired the land, you had a purpose or intention of disposing of it, any profit from the eventual sale will generally be taxable.
The intention to sell does not have to be your main or dominant reason for buying the property. It can be one of several purposes or intentions.
For example, you might buy a property because you intend to use it as a long-term investment, but at the same time have a firm intention to subdivide and sell part of the property. That intention can be enough for the land-sale rules to apply to the relevant disposal.
The intention needs to be more than a vague possibility.
A common example would be purchasing a farm that has two houses on it where, at the time of purchase, you have a firm plan to retain one house and subdivide and sell the other.
The subsequent sale may be taxable because the property was acquired with the purpose or intention of disposal.
The important point is that this is determined by looking at the circumstances at the time the land was acquired. What you intended to do when you bought the property can therefore be just as important as what you eventually did with it.
There is no 10-year time limit on the general intention or purpose test.
The bright-line test
The bright-line test is a separate rule applying to residential land.
For residential land disposed of on or after 1 July 2024, the current bright-line period is generally two years, subject to the relevant exclusions and rollover relief provisions.
The bright-line test is comparatively straightforward compared with some of the other land-sale provisions because it is primarily concerned with the period between acquisition and disposal.
However, it is important not to make the mistake of thinking that a property sale outside the bright-line period is automatically tax-free.
The other land-sale provisions continue to apply.
In other words, getting past the bright-line test does not necessarily get you past the tax rules.
Subdivision and development where the work is more than minor – Section CB 12
Another important provision applies where a person undertakes a scheme involving the development or division of land into lots.
Section CB 12 can apply where the development or division begins within 10 years of acquiring the land and the development or division work is not minor.
What constitutes “minor” is a question of fact.
Inland Revenue has issued Interpretation Statement IS 20/08, which provides detailed guidance on this issue.
The assessment looks at the circumstances as a whole. Matters that can be relevant include:
- the total cost of the work, both in absolute terms and relative to the value and nature of the land;
- the professional services involved;
- the extent of the physical work undertaken; and
- how significantly the physical nature or character of the land has changed.
My practical warning sign is when a subdivision moves beyond simply obtaining plans, surveys and professional advice and starts involving physical work that changes the land itself.
Once you are moving significant amounts of dirt, constructing roads, installing drainage or other services, I would want the tax position considered carefully.
It is not simply a question of whether a particular piece of work is physically large or small. The overall circumstances matter.
Major development or division – Section CB 13
There is also a separate provision dealing with major development or division of land.
This can apply where an undertaking or scheme involves significant development or division work.
Examples of major development work can include:
- earthworks;
- roading;
- drainage;
- contouring;
- kerbing; and
- other significant works or amenities associated with developing land.
The important point is that the tax consequences of a development do not necessarily depend on how long the land has been owned.
This means that a property which has been held for many years can still be caught by the land-sale provisions if significant development or subdivision work is subsequently undertaken.
Changes in zoning and other changes affecting land – Section CB 14
Section CB 14 deals with certain disposals where the value of the land has increased because of a change affecting the land.
This can include matters such as:
- a change in zoning;
- a resource consent or other consent;
- a decision of the Environment Court;
- the removal of a covenant or condition; or
- other specified changes affecting the land.
The provision can apply where the land is disposed of within 10 years of acquisition and at least 20% of the profit is attributable to one or more of the relevant factors.
There is a specific deduction available under section DB 28 where this provision applies. The calculation is subject to the detailed requirements of the legislation and includes a limit on the amount of the deduction.
This is an area where professional advice is particularly important because establishing whether the increase in value is attributable to the relevant change can be a factual exercise.
Property dealers and developers – Sections CB 9 and CB 10
Special rules also apply to people who are in the business of dealing in land or developing or subdividing land.
If you are in the property business, the fact that a particular property was held as an investment does not necessarily mean that a subsequent gain will be tax-free.
There are also 10-year rules that can apply where land is sold after being acquired while the taxpayer, or an associated person, was in the relevant property business.
The associated-person rules are important.
You do not necessarily have to be the property developer yourself. Your relationship with another person or entity involved in the property business can be enough for the rules to become relevant.
Builders – Section CB 11
There are similar rules applying to people associated with a building business.
Broadly, section CB 11 can apply where improvements have been made to land and, when those improvements began, the person was associated with a person carrying on a business of erecting buildings.
Again, the 10-year period is important.
The fact that the property was not purchased as part of a building business does not necessarily mean that the subsequent sale is outside the land-sale rules.
There are other rules as well
The provisions discussed above are the main land-sale provisions, but they are not the only way a profit from the sale of land can become taxable.
For example, land can be taxable under the general business income provisions or where the transaction forms part of a profit-making undertaking or scheme.
This is why I am always cautious about giving a simple answer to the question:
“I’ve owned the property for more than two years, so is the gain tax-free?”
The answer may be yes.
But it may also be no.
The reason the property was purchased, what happened to it while it was owned, what work was undertaken and the circumstances surrounding the eventual sale can all be relevant.
The lesson
The safest approach is to consider the tax position before you buy, subdivide, develop or sell land, rather than after the transaction has taken place.
The intention at the time of purchase can be important. So can the work subsequently undertaken, changes in zoning, relationships with property businesses and the circumstances of the eventual sale.
Land transactions can involve significant amounts of money, and a tax issue discovered after settlement can be expensive to fix.
The land-sale provisions are detailed and, in themselves, can be quite taxing.
If you are considering buying, subdividing, developing or selling land and there is any doubt about the tax treatment, we recommend obtaining professional tax advice early.
This article is intended as general information only and does not constitute specific tax or legal advice. The tax treatment of a land transaction depends on the particular circumstances, including the nature of the property, the reason for its acquisition, activities undertaken while it was owned and the circumstances of its disposal.