Invest in property
Tax! Getting the Right AdviceIf you're buying and selling property, whether it be your family home or not, it is recommended you seek advice from a tax professional.
Invest in property
One of the factors that may not have crossed your path on your home ownership journey thus far, is that of tax consequences. This topic should certainly be discussed with a specialist who can provide you with a review of the benefits or consequences that may occur as an investment owner or individual dealing with selling and buying property.
Buying and selling
Buying and selling your home usually has no tax implications. However, if you buy a home with the intention to flip or resell it and you do this regularly, you could earn income from this process. This is commonly known as property dealing and does have tax implications to consider.
Income from rental property
Another form of tax you may need to educate yourself on is the tax applicable on your rental income. The amount of tax you pay is determined by factors such as the type of property it is and the rental term, is it a short-term stay or long-term tenancy?
Here are some examples of rental incomes that could have tax implications:
- Renting out your home or its rooms to boarders
- Leasing the use of your land
- A caravan on your property
- A sleep-out
- Your holiday home
Interest Deductibility
As of 01/10/21 there are new rules around deducting interest expenses on rental properties.
- Home loan interest on a residential investment property acquired before 27 March 2021 is gradually being phased out. Between now and 31 March 2025 the percentage of interest you can claim as an expense reduces to zero. For properties purchased after 27 March 2021, interest cannot be claimed as an expense, unless an exclusion or exemption applies.
- There are exemptions for owners of new builds, residential developments, and land businesses
The Bright-line property rule
You may not have come across this rule yet but if you sell your home before you have owned it for less than 10 years, you may have to pay income tax on any gain from the sale. This is called the bright-line property rule and it also applies to New Zealand tax residents who buy overseas residential properties.
The bright-line property rule looks at whether the property was acquired:
- on or after 27 March 2021, and sold within the 10-year bright-line period
- between 29 March 2018 and 26 March 2021, and sold within the 5-year bright-line period
- between 1 October 2015 and 28 March 2018, and sold within the 2-year bright-line period.
If you sell a property outside these bright-line periods, the income tax on any gain on the sale is not applicable.
Initial or early owners of new builds would be subject to a five year bright-line test, rather than the ten-year test.
The bright-line property rule does have some exceptions. The bright-line property rule generally does not apply to the sale of an owner-occupied residence, inherited property, or if you are the executor or administrator of a deceased estate. It also is exempt for Property acquired before October 1, 2015.
Summary
Engaging with a professional who can take you through tax related topics as it pertains to owning an investment property or changes to your income through any development is highly recommended. An accountant, other tax specialists and trusted professionals who specialise in tax, property law and investments, will be able to explain and expand on your knowledge, to keep you up to date with all you need to know.
Reach out to us in the chat bubble below or have a look at our useful links and related questions for more valuable information.
Related Questions
When does the bright line property rule not apply?
The bright-line property rule does not apply to properties acquired before 1 October 2015.
What is a Capital Gain and how is it calculated?
A capital gain is the profit you make from selling your home, looking at the increased value when compared to the price you originally paid for the property.
Capital gain/profit = current value of property minus purchase price (price you originally bought the property for)
In NZ there is no specific capital gains tax rate, so assuming your property transaction meets the criteria for taxation under the bright-line test, the amount of tax you pay would be based on your total income and taxed at the appropriate income bracket (i.e., 10.5%, 17.5%, 30%, 33% or 39% accordingly).
For example, you earn a salary of $150,000 and make a $400,000 profit from your house sale. This $400,000 is regarded as income so you would meet the threshold for the top tax bracket and most of this profit would be taxed at the 39% (which is for any income above $180,001). As mentioned above, we recommend getting in touch with your accountant to discuss best practice with your property purchase and sales.
© Copyright 2022 Tella (New Zealand) Limited. All Rights Reserved. Powered by Tella.