Tax Changes for Investment Properties

9 November 2016
With the recent alteration in tax regulation regarding investment properties it is important to be aware of the implications when buying and selling investment properties.  
 
As of 1 July 2016 Residential Land Withholding Tax (RLWT) will need to be deducted from some residential property sales.  Under the new rules there will be tax on the income earned if you buy and sell a residential home within two years. All existing property tax rules still apply (i.e capital gains would attract a profit if it was deemed that the purpose of the purchase of a property was for the purpose of making a profit).
 What is residential land?
The Bill’s proposed definition of residential land is land that has a dwelling on it, land where there is a plan or understanding to build a dwelling on it and bare land that by its area and nature is capable of having a dwelling erected on it. IRD says the latter will include bare land zoned as residential.
Land used predominantly as business premises or farmland (including forestry, horticultural and pastoral businesses) will not be residential land.
 
Exceptions:
The exceptions to this legislation is as follows:
•        The main home, being the property used predominantly, for most of the time that the seller has owned the property, as their main home.  
•        Transfer following death to an executor, administrator or beneficiary, and subsequent disposal by those persons.
•        Transfer under a relationship property agreement (where a relationship breaks down). 
 
Trusts
Unlike the new property tax information rules, residential land owned by a trust can qualify for the main home exception, but only if both:
•        The trust-owned property is the main home for a beneficiary of the trust; and
•        The principal settlor of the trust does not personally own a main home (the principal settlor being the person who has settled the most property, by value, on the trust).
In addition, if the principal settlor is a beneficiary of the trust and the trust owns the property that is the settlor’s main home, the main home exception applies only if it is that dwelling which the trust is selling, not another dwelling owned by the trust in which another beneficiary resides.
 
 
 
While the new laws have meant an increase in tax liabilities to property investors it is important not to jump to conclusions that the purchase and sale of a property will indeed be detrimental to your financial position.   It is also important to be aware that if you purchase and sell property that you have not lived in you could be liable to pay extra costs in the form of the RLWT.  Either way it pays to be informed prior to any decisions being made and as such we would recommend consulting your Accountant first.  
 
(Many thanks to Cathy De Farias Manager and Judy Watson Director/Technical Manager FishersQuay Chartered Accountants for their input for this article).
 

Published In Whakatane Beacon

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Trish Marsden - who has written 96 posts

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