Tax implications of sub-dividing your property

Question from Morgan updated on 27th October 2006:

I am planning to subdivide a property and build another house on the land in Christchurch and am trying to decipher the tax implications. As far as I understand, I will not be required to pay tax if;(a) I keep the property for ten years before subdividing,(b) I rent the properties out for an unspecified period, or(c) I or my family live in the properties for an unspecified period. The questions I have are:(a) Will I be liable for tax if I keep the property for ten years after subdivision? (b) What sort of periods are we talking about for the renting/family clauses?(c) If I keep one and rent it out and sell the other, will I be liable for tax or can I apportion costs to each property leaving me with a loss until I sell number two. My argument is that with rising prices and mortgage rates and extremely low yields, the only way for me to earn useful rental income is to subdivide I am hoping the IRD will see this as intending to make rental income and assess accordingly.Does anyone have any experience with the IRD in such a situation?

Our expert responded:

Ultimately, in a situation such as this, it comes down to what your intention was at the time when you originally purchased the property. If your intention was to own the property long term, then chances are that any gain won't be taxable. If your intention at the time of purchase was to subdivide and sell off, then it will not matter how long you own the property, any gain will be taxable. Whenever you buy a property, especially if it's a buy and hold long term property, it's a good idea to ensure that your intention is well documented at the time of purchase with your accountant and solicitor. A suggestion for you - why don't you just build the second property and not do the subdivision if your main aim is to maximise your rental return? There is no requirement to subdivide as long as you meet the council's requirements for land use. If you rent out the second property, then it is likely that any gain will not be taxable. However, it will, again, come back to your intention at the time of purchase. Although the 10 year rule exists (generally, if you own property for more than 10 years and then sell it, the gain is not taxable), IRD can still assess the sale as taxable because significant expenditure was incurred. There are some exemptions which may apply such that if you sell the property, only the gain on the subdivided section will be taxable.

 


Kenina Court is a director of Acorn Solutions Limited, an accounting firm dedicated to working with clients to help them create wealth. She is an avid property investor, entrepreneur and seminar presenter on asset protection and wealth strategies.




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