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If you subdivide and then sell off a part of your existing section, you only need to pay tax in certain circumstances.

Generally, you do not need to pay tax if all of the following apply.

  • You do not have a pattern of buying and selling properties.
  • You did not buy the undivided section with an intention of selling part or all of the property.
  • The bright-line property rule does not apply to the sale.

Your intention when you buy

If you buy a property intending to subdivide and sell off some or all of the sections, the profit from the sale of those sections is taxable. This also applies if you buy several already subdivided sections intending to sell them.

Subdividing your home

If you buy a residential property, intending to live in the existing home and to subdivide then sell off the other part of it, then you probably need to pay tax on your profit when you sell the subdivided part. This is because you always intended to subdivide and sell.

You do not pay tax when you sell the part you live in.

Get tax advice

The tax rules around the sale of subdivided and developed sections are complex. We recommend you speak with a tax advisor to make sure you’re getting it right.

Dealers, developers and builders

If you're a dealer, developer or builder, you must pay tax on the profit of any property you sell that is part of your property or building business.

If you decide to leave the property business, you may still own some properties. If you sell these properties within 10 years of buying them, any profit you make is taxable. This is the 10-year rule.

Learn how the 10-year rule could apply to you.

Property dealers, developers and builders

Subdividing co-owned land

Sometimes people pool resources to purchase land, becoming co-owners. Co-owners may then subdivide and allocate the land based on their original ownership interests. This is known as partitioning. In some circumstances the subdivision may be treated as a disposal of land at market value under the bright-line property rule or other property taxing rules.

The bright-line property rule or other property tax rules do not apply if the value of the partitioned land matches the interests you and your co-owners had in the undivided land. The value includes your contributions as co-owners to development and building costs.

If the land of a co-owner's partitioned interest after subdivision is more than their original co-ownership interest in the undivided land, the difference may be taxable.

When the difference is not taxable

If the difference in allocations is less than 5% of the smallest co-owner’s original interest, the difference is not taxable. A difference could happen because of the land topography (landscape).

When the difference is taxable

If the difference is 5% or more of the smallest co-owner’s original interest, the full difference is taxed under the bright-line property rule or other property tax rules.

Example – Subdividing co-owned land - Allocation not proportional to original shares

Maggie and Jordan are co-owners in a residential property purchased for $1 million. Maggie contributed $750,000 (holding 75% interest) and Jordan contributed $250,000 (holding 25% interest). They subdivide the land in 2 and allocate the parcels to themselves.

Due to the landscape, Maggie’s land allocation changes to 74% and Jordan’s 26%.

Because the difference between Jordan’s original holding and the new allocation is less than 5% the transaction is not taxed under the bright-line property rule or other property taxing rules (5% of 25% is 1.25%).

Tax Technical advice

Read more about the application of the land sales rule to co-ownership changes and changes of trustees on our Tax Technical website.

IS 22/03: Income tax – Application of the land sale rules to co-ownership changes and changes of trustees
Tax Information Bulletin (TIB), Vol 35, No 6 (July 2023) pages 124 to 126.

Associated with someone in the property industry

The same rules apply if you're associated with someone in the property industry. This means you may have to pay tax on some or all of your property sales or transfers, even if you're not personally a property dealer, developer or builder.

Associated with a property dealer, developer or builder

Non-minor subdivisions started within 10 years

If you develop or subdivide land within 10 years of buying it, the development or subdivision is taxable unless the work is minor.

Minor means very little work, time, effort and expense is needed. For example, if the only costs were the surveyors and lawyers’ fees.

Read more about when development or division work is minor in our interpretation statement IS 20/08 below.

Major developments or subdivisions

If the development or subdivision involves significant spending or work, it’s generally taxable, with some exceptions. Major development work includes:

  • earthworks
  • roading
  • draining
  • contouring land.

Tax Technical advice

Read more about non-minor subdivisions, major developments and significant expenditure on our Tax Technical website. 

QB 15/02: Major development or division – what is significant expenditure?
IS 20/08: Income tax – when is development or division work 'minor'?

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Last updated: 01 Apr 2024
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