IRD focus on property dealings

Each year the Inland Revenue Department sets internal goals and decides which industries it will focus its efforts on investigating in the upcoming period. One of this years targets are property transactions. For a family who own a home this probably wont be anything to worry about but some people who have been buying and selling properties may find themselves in trouble if they are investigated.

The big question facing property owners is whether or not they need to pay tax on the sale of a property. The answer to this is not straightforward as it depends on many factors including:

Are you a property investor or a property dealer/trader?

Most property investors reluctantly acknowledge that they have to repay depreciation claimed if they sell their investment property for a profit, but many don’t believe they should pay income tax on the profits. It all comes down to your intent when you purchased- if you purchased an investment property with the intent to keep it long term and generate income from the rental then you don’t have to pay tax on the profits. If however you developed the property or bought it with the intent of selling it for profit then you would be considered a property dealer and would need to pay tax on your income. The IRD will also take into consideration other factors such as the length of time you owned the property and the number of properties you have bought and sold.

Are you associated with someone who trades in properties?

The situation can be further complicated by the associated persons rules – even if you were not a property dealer yourself you could be tainted by a partner, trust or business you are involved in if they have property dealings. It can be difficult to understand the complexities of the tax legislation so it is best to seek advice from your accountant on these issues.
Getting advice

Ignorance is not a defense, it is your responsibility to find out your tax obligations. You need to do your homework and get advice on whether or not you need to pay tax on your property sale. Its far better to do so at the time than have IRD come after you later on and impose additional penalties. Remember the old saying you cant escape death and taxes!

IRD has a handy Property Decision Tree that allows you to check if you have to pay tax on a property you have bought and resold for a profit.

Accountant in Auckland using XeroBrad Golchin, CPA –   
Call: 09 639 1001

Wise Advice – Xero Platinum Partner Accountants

Twitter: @bgolchin