Generally, if you buy property with the intention of reselling it, you’ll have to pay tax on any profit you make from its sale.
This is called the intention rule. It applies to both commercial and residential property, so you need to think about your intentions when you first buy a property. What you intend to do with it will determine your tax when you go to sell.
This usually does not apply to your main home or if you bought the property as a long-term rental investment.
If you have several reasons for buying
The intention to sell does not need to be the main reason for buying the property - it could be one of several reasons for buying.
For example, if one of your intentions when buying is to flip the property, even if you rent it out, you'll still need to pay income tax on your profit when you sell it.
Time frames and the bright-line property rule
The intention rule applies no matter how long you keep the property before selling it.
The intention rule also applies before the bright-line property rule, which only applies to residential property sold within certain time periods.
Moana buys a property with the intention of providing a home for herself and her children
When Moana eventually sells her home, she hopes to make a profit 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.
Moana will not pay tax on the profit from her property sale as her intention was always to provide a home for her family. If Moana bought and sold the property within an applicable bright-line period, she needs to consider the bright-line rule including any exclusion that may apply. Because the property was used as her main home the whole time during the bright-line period, she is eligible for 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 the property is in, so they 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.
Frances and Bruce buy a second property in the hope that it will quickly gain in value. They decide to rent it out in the meantime. One of their reasons for buying the property is to sell it and make a profit from any increase in its value.
When they do sell, Frances and Bruce must declare the profit in their yearly IR3 tax returns, because part of their intention when they bought the property was to sell it.
Tax Technical advice
Read more on our Tax Technical website about when you may need to pay tax on income from selling land that you bought with the intention of reselling.
QB 16/06: Income tax - land acquired for a purpose or with an intention of disposal
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