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Buying a family home
If you're buying a property with the intention of selling it, you will have tax to pay on the profit you make.
A family home is the main property where you/or your family live. If you're buying a family home, you're unlikely to have to pay tax on any profit from its eventual resale - that's unless you're regularly buying and selling the homes in which you live.
The tax you pay depends on three things:
- Whether the "residential exclusion" applies.
- Whether you're in or associated with the property industry.
- Whether the "main home exclusion" applies.
The residential exclusion
Even if you bought a property with the intention of selling it, or if you're a property dealer, developer or builder, the gain you make on the sale of a property is not taxable if:
- you bought the land with a house on it (or built a house on the land), and
- the house is occupied mainly as a residence by you and any family member living with you.
This is called "residential exclusion". It also applies if you are a trustee of a trust and the house is used as a residence by one of the beneficiaries of the trust.
However, the residential exclusion does not apply when:
- you have a regular pattern of either buying and selling or building and selling residential housing
- you only use the property as a residence for a short period of accommodation used on a short-term basis like hotels and motels.
In which case, you will have to pay tax when you sell the property.
If you're associated with a dealer, developer or builder
If you're associated with someone in the property industry - you're an 'associated person'. This means you may have to pay tax when you sell your family home, even if you're not personally a property dealer, developer or builder.
These transactions include tax on the sale of a property if you had an association with:
- a property dealer or developer when you brought the property.
- a builder when significant improvements started on a property.
The associated person rules changed for land acquired on or after 6 October 2009, and the definition of what's meant by some associations has widened. For more information about associated persons and property transactions, read these guides:
- Tax and your property transactions (IR361)
- A guide to associated persons definitions for income tax purposes (IR620)
The bright-line main home exclusion
If you buy and sell your family (main) home within five years (two years for properties purchased on or after 1 October 2015 through to 28 March 2018), the income you earn from the sale of the property is not taxable if you used:
- the property as your main home more than 50% of the time while you owned it
- more than 50% of the area of the property as your main home. This includes the yard, gardens, garage, pool areas and tennis courts, etc.
If you meet the above criteria, you're eligible for the "main home exclusion" under the bright-line test.
If you're the trustee of a trust and the property is used as a residence by one of the beneficiaries of the trust, the main home exclusion can be applied when the property is sold, see Residential properties held in trust below
You can only use the main home exclusion twice over any two-year period.
The main home exclusion does not apply if you show a regular pattern of buying and selling residential property.
You live in more than one property
If you own more than one property, you need to decide which one is your main home. When deciding which property is your main home, think about:
- where your personal property is kept
- the amount of time you spend living in each house
- where you immediate family lives
- where your social ties are strongest
- your use of the home
- what other ties (for example: employment, business, economic) you have with the surrounding community.
You cannot have more than one main home.
Residential properties held in trust
Residential properties held in trust can apply the bright-line main home exclusion if:
- the house sold was the main home of the principal settlor of the trust, or the principal settlor doesn't have a main home, and
- it was the main home of a beneficiary of the trust.
The principal settlor is the person who has made the biggest financial contribution to the trust, ie their settlements to the trust have been greatest by market value.
Talk to your tax advisor if you need advice.
The profit from my family home is never taxed.
What the law says: Not always. If your history shows a pattern of buying and selling or building and selling residential properties, then it's likely you'll have to pay tax on any profit you make from selling these properties - even if you consider one (or more) of the properties to be your family home.
There are also different rules if you're associated with property dealing, development or building, in which case you should get professional advice from a tax advisor.
Three years ago, Jason and Kevin each bought a family home and lived in these properties with their families. Yet when it comes to selling their family homes, one of them has to pay tax and the other doesn't.
Jason is a residential property dealer and over the past six years, he has bought and sold four houses. He’s always lived in the properties with his family.
Because Jason has a regular pattern of buying and selling residential property, any profit he made from selling his homes will be taxable.
Kevin sold his last family home more than five years ago and the one before that 10 years ago.
Because this is Kevin's family home and he hasn't got a pattern of regularly buying and selling residential property, he won't have to pay tax when he sells his family home.
Does the main home exclusion apply when you rent part of the property you live in?
Anika owns a three story house. She lives on the first floor and rents out the other two floors.
If Anika sold the property within five years of her purchase being registered, she cannot use the main home exclusion because more than 50% of the property is rented out.
Deciding which is your main home when you own more than one property
Trevor has two homes. His first home is a small apartment in Christchurch that he lives in four days a week while he works in Christchurch.
His second home is in Wellington, where his family lives. Trevor lives in his Wellington home on the day's he is not in Christchurch. He is a member of the local tramping club and is on the Board of Trustees of his son's school in central Wellington.
The Wellington home is Trevor's main home as it is the place he has the greatest connection with.