Mistaking property dealing for property investment

Property investor is a collective term for property speculators, dealers and investors. However, they are each treated very differently under tax law.

• Factors to consider when determining your status
• What is an investor, a speculator and a dealer?
• If you are not clear on your intentions for buying a property
• How long do I need to hold the property to make it a capital gain?
• How many properties can I sell before it is considered taxable?

Factors to consider when determining your status

Three main factors can determine your status as a property buyer for tax purposes:

• your intention when you buy a property
• the patterns of your previous property transactions
• your association to a builder, property dealer or developer.

The category you fall into isn’t determined by what the property is called or how the activity is described. For example, it may be marketed as a “rental investment” with strong “capital gain” potential, but your firm intention or prior pattern is the factor that determines its tax treatment or if you're involved in or associated with someone in the business of building, dealing, developing or dealing with land.

If you’re an investor you buy a property to use it to generate ongoing rental income and not with any firm intent of resale. The property is a capital asset and any later profit or loss from selling the property is capital and isn’t taxable (apart from clawing back any depreciation, which is now recoverable).

The rules may be different if you’ve been associated with a person or entity involved in the business of building, dealing, developing or sub-dividing land.  

If you buy a property intending to:

• resell it, or
• you intend to sell it after making improvements to it

you're likely to be a speculator or a dealer. Renting your property temporarily doesn't change your tax treatment either - you're still a speculator or a dealer.

What is an investor, a speculator and a dealer?

Investor

If you’re an investor you buy a property to use it to generate ongoing rental income and not with any firm intent of resale. The property is a capital asset and any later profit or loss from selling the property is capital and isn’t taxable (apart from clawing back any depreciation, which is now recoverable).

Property investors sometimes refer to a “buy and hold” strategy. This approach is most likely to mean you are a property investor for tax purposes.

Investors will investigate and analyse future revenue streams, and any gain made on the sale of the property is incidental. Their investment is soundly based on a return from the rental income.

Investors pay income tax on their net rental income but generally not on the eventual sale proceeds of the property.

Speculator

You might think profits from selling property are always capital gains so you don’t have to pay tax on them.  But, this isn’t always true. If one of your reasons for buying a property is to resell it, whether you live in it or rent it out, you’re speculating in property and your profit is likely to be taxable. And, if you sell that property at a loss, the loss may be tax-deductible.

If you’re a speculator you buy a property always intending to sell it. The property is treated like “trading stock” and your profit or loss from selling the property is taxable. Speculating can be a one-off purchase and sale of a property.  Speculators may also receive rental income from the property before they sell it.  

Property dealers or speculators will try to determine and analyse the property’s future price movements because that’s what the deal rests on. Any rental income is secondary.

To be a speculator, you need buy only one property with the firm intent of resale.
Dealers and speculators must pay income tax on any gain they make from reselling their property. If they declare a loss, it may be tax-deductible. They must also pay tax on rental income they may earn from the properties.

Dealer

If you're a dealer you are similar to a speculator buying properties for resale, but you have established a regular pattern of buying and selling. This includes rental properties.

Some property buyers refer to a “buy and flick” strategy. This approach is most likely to mean you are a property speculator or dealer for tax purposes.

Dealers and speculators must pay income tax on any gain they make from reselling their property. If they declare a loss, it may be tax-deductible. They must also pay tax on rental income they may earn from the properties.

If you are not clear on your intentions for buying a property

Read our guide Buying and selling residential property (IR313)

If you're buying and selling property other than a private family home, we recommend you get advice from a tax advisor with expertise in this area.

How long do I need to hold the property to make it a capital gain?

There is no time limit. If you buy a property with the firm intention of resale, it doesn’t matter how long you hold it - the gain on resale will be taxable (and any loss may be tax-deductible).

How many properties can I sell before it is considered taxable?

There is no set number of properties you can have before they become taxable. In some cases the first property bought and sold may be taxable if you bought it for resale. In other cases there could be a number of factors to take into consideration, such as having a regular pattern of buying and selling property, before a property is taxable.

The factors that may be looked at will vary because each taxpayer’s circumstances are different. For example, buying one property every two years may be considered a regular pattern for one individual and not another.

Find out more about what tax you should be paying

 

Date published: 30 Jul 2010

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