Tax warning to property speculators

photo: Royal Bank of New Zealand

People who buy and sell properties with the intention of making a profit may be asked to pay tax even if they hold onto the home for more than two years – and even if they live in it themselves, it has been warned.

Today, the bright-line test has been shortened to two years, meaning that investors who hold a property for at least two years will not automatically receive a tax bill for any gains they make on that property.

But tax expert Robin Walker, partner at Deloitte, said people needed to understand that this did not mean everyone was automatically off the hook.

The Revenue recently released a tool to help people understand whether their property is taxable under any land tax rules.

These include people who buy properties with the intention of reselling them, regardless of how long they have held on to the property, or people who have a history of buying and selling that would qualify them as dealers, as well as those who are subject to the bright line rule.

As part of this, the department noted that its next area of ​​focus in the real estate sector will be speculators who frequently buy and sell.

Regardless of the bright line test, any property purchased with the intent to sell may be subject to tax.

Walker said the department had an information-sharing agreement with Land Information New Zealand (LINZ) which would allow the department to contact people of concern.

“They will track the number of sales by a particular taxpayer and be able to see ‘have I developed a pattern of selling more than three properties in 10 years’.”

The tax office said there was no hard and fast rule on how many times people had to buy, sell or renovate a home and sell it without having to pay tax, but it generally required three previous transactions to establish a pattern.

“The reason or purpose of each transaction is not important; what matters is the similarity of the transactions.”

Mr Walker said the tax office was able to quickly detect if someone was surrendering a property relatively quickly.

“Identifying house flippers and the like. Some people may clearly be subject to land regulations because they buy a property with the intention of selling it – they live in it, so they may think they have the principal residence exemption, but that exemption is overturned when you live in it and renovate it with the intention of selling it.

“They will certainly pick up on sales and I’m sure their new computer systems are sophisticated enough to pick up links between taxpayers. If a couple has split properties between different people or IRD numbers, or put properties in a trust or company, I’d expect the system will have the analytical capability to figure out that these interconnected entities are buying properties and start an information request from that.”

She said taxpayers would then be asked to provide information to explain why they believe they do not need to pay tax.

Even if people hold onto their properties for more than two years, they may still develop a pattern that causes concern, she said.

“Once you establish that you engaged in such activity, there is a nexus. The burden is on the taxpayer to prove why they should not be taxed on those transactions.”

She mentions one couple who bought and sold 11 houses in 12 years. “They had all sorts of excuses… there was a weirdo next door. They had to sell. They didn’t want to flip, the living situation… Then they moved to a new house next to a noisy railway line, then they moved to another house next to another weirdo, then they found all the houses were on the same street.

“It’s a good example of what the tax office has to deal with when it reviews things like this. It’s a matter of trying to unpack what you’ve been told and find out the truth of the matter.”