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Buying to sell
If you're buying a property with the intention of selling it, you will have tax to pay on the profit you make.
The tax you pay depends on four 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
You may have a number of reasons for buying a property. If one of these is to resell the property, then you'll have to pay tax on any profit you make when you sell. You'll need to declare the profit as income on your tax return, regardless of how long it's been since you purchased the property.
Your history of buying and selling counts
If you have a history of buying and selling property then you may be a property dealer and will have to pay tax when you sell property, even if it was your family 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
If you're in the business of dealing in land, a builder or developer, then income from property purchased as part of that business is taxable in the normal course of business. There are also additional rules for other land that you deal with outside your business which is sold within 10 years.
If you purchase property - either as:
- part of your property business; or
- as part of your building business and you make improvements to the property
you will be liable to pay tax on the profit when you sell the property. This is regardless of whether you're still in business or not.
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 the 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 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.
When your circumstances change
What if you change your mind?
You may have bought a property with the intention of selling it at a higher price, but you decide that the rental income you're making from renting the property is good enough that you don't want to sell it.
However, it's your intention or purpose at the time you agreed to buy the property which is important. While the property becomes a rental investment, any profit you make when you sell will still be taxed - because your original intention at the time you agreed to buy the property was to sell it.
You decide to rent out your property
While you may have bought a property with the intention of selling, you decide to rent it out before you sell.
If so, you'll have tax to pay on the rental income you earn, as well as the income you earn when you sell the property. You'll also have to make a GST adjustment because you're no longer using the property for the main reason you bought it - which was to sell it for a profit (making taxable supplies).
I can make a profit on property in New Zealand and it's all tax free.
What the law says: Not true. If you purchase a property with the intention of selling it you'll have tax to pay on any profit you've made. There are also different tax rules if you're involved in property dealing, development or building which may mean you'll have to pay tax on the profit from the sale, even if you didn't intend to sell the property when you purchased it.
Moana and Sue both move house - one of them has tax to pay and the other doesn't.
Moana buys a property with the intention of providing a home for herself and her children. When she eventually sells it she hopes to make a gain and leave her children a legacy.
In a year's time she gets a new job and decides to sell the property to move closer to her new job. Property prices have risen, so Moana is able to sell the house for much more than she paid for it and can buy a bigger home. The gain from the sale of Moana's property is not taxable as her intention was always to provide a home for her family.
If Moana bought and sold the property within two years, she needs to consider the bright-line test. However, because the property is her family home, she can claim the bright-line "main home exclusion". This means any profit from the sale is not taxable.
Sue buys a property with the intention of selling it for a higher price when the time is right.
Sue and her family decide they like the area and live in it in the meantime. Sue has a regular pattern of buying and selling residential properties while living in them.
Two years later, house prices in Sue's area have risen to a level where she could make a good profit on the sale of her property and she decides to sell.
The sale of Sue's property will be taxable, because her intention at the time she purchased it was to sell it, and because she has a regular pattern of buying and selling residential property. Sue declares the profit on the sale as income on her IR3 tax return.