Subdivision taxes
Question from Nagoor updated on 7th August 2020:
I have had a rental for the past five years under an LTC. The property consists of two dwellings. I am now in the process of subdividing and getting two titles for the two dwellings. I am not sure if the development can be classified as major or minor and thereby would attract tax on the profit if I sell both the dwellings.
The work undertaken consists of having to upgrade the existing vehicle crossing and a new storm water connection. The total cost is about $15,000 and all the council and engineering costs are about $40,000. My question is if I sell both the houses after getting the separate title will the profit be taxable? This sale will not attract the bright line test law provisions.
Our expert Matthew Gilligan responded:
Based on the facts you have provided, you are commencing a subdivision within 10 years of acquisition, which means if the subdivision involves work of more than a minor nature then section CB 12 of the Income Tax Act will apply and any gains will be taxable. I can’t give you a firm view on whether your subdivision will qualify as minor or not because there are other considerations outside of the facts you have given that are relevant.
What I can say is that if you are subdividing one into two and there are relatively minor costs involved and little physical work (which both appear to be the case here) then there is definitely a prospect of you having an arguable position that the work is minor in nature only. If you can make that argument, then section CB 12 does not apply.
Although you are quite right that the bright-line rule would not apply if you have held the property for five years, there are other provisions that you need to cover off as well. For example, section CB 14 can apply where a property is sold within 10 years and it has benefited from a rezoning or a resource consent being granted.
I strongly recommend that you get tax advice before proceeding and ensure that any tax position you take is supported by robust, written advice from a tax specialist.
Matthew heads GRA's specialist property and asset planning division. He helps clients create optimal tax structures and build wealth through property. He has an extensive buy-to-hold property portfolio, is currently involved in over a dozen developments, and is author of two books - Property 101 and Tax Structures 101.
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