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Buying a holiday home
If you're buying a property with the intention of selling it, you will have tax to pay on the profit you make.
If you're buying a holiday home and you plan to rent it out, you'll have to pay tax on the rental income you earn. You may have to pay tax when you sell the property as well.
The tax you pay depends on three things
- Your intent when you purchased.
- Your history of buying and selling.
- Whether you're in or associated with the property industry.
- Whether you buy and sell a property within two years.
It's your intention when buying a property that matters
If you bought the holiday home with no firm intention of selling, then you're unlikely to have to pay tax on the profit from a sale. However, if there are several reasons for buying the property and one of these is for resale, you'll have to pay tax on any profit from the sale - regardless of how long it's been since you bought it.
Your history of buying and selling counts
If you have a pattern of buying and selling property, then you may be a property dealer and will have to pay tax when you sell property - even on your holiday home. If you're unsure whether you may be a property dealer, you should seek advice from a tax advisor.
If you're a dealer, developer or builder
Special rules apply if you are a property dealer, developer or a builder. If you purchase a holiday home or other property as part of your business, you will be liable to pay tax on the profit when you sell this property, even if you're no longer in business.
Selling within 10 years
If you're a property dealer or developer you will be liable for tax if you sell a property within 10 years of purchase. This is regardless of whether the purchase is part of your property business or not.
If you're in the building business you will be liable for tax on property that you sell within 10 years of having completed building work. This is regardless of whether you hired someone else to do the building work or not, and regardless of whether the property purchase was part of your building business or not.
You buy and sell a property within two years
The bright-line test only applies to properties bought on or after 1 October 2015.
If you buy and sell a residential property, like a holiday home, within two years, you'll pay tax on the income you earn from the sale. This is regardless of your intention at the time of the purchase. A withholding tax may also be deducted at the time of sale.
Generally the two-year period starts on the date the property transfer is registered with Land Information New Zealand (LINZ). If the property is in another country, it's the date the transfer was registered under that country's laws.
Different dates apply if you:
- sell the property before your purchase is registered with LINZ (for example a sale or purchase "off the plan")
- subdivide a section.
Paying tax on your rental income
If you rent out the holiday home, you'll have to declare the rental income you earn when you complete your annual tax return (IR3). It doesn't matter if the holiday home is rented out for the short periods or long-term - you need to declare any rental income.
However there are different tax rules if you have a mixed use holiday home - where you use the holiday home yourself and you rent it out as well.
If I buy a holiday home and rent it out, I don't have to pay tax on the income I earn.
What the law says: Not quite. If you're renting the holiday home out long-term, it gets treated like a residential rental and you'll need to declare the income. If it's not a long-term rental but you make more than $4,000 a year from renting it out then you'll have to declare the income you earn when you complete your tax return. If your income from renting the holiday home is less than $4,000 for the year and it's in use for less than 62 days in the income year, you can opt to keep the holiday home outside the tax system.