To help you determine whether you’ll need to pay a property tax, here’s a run through of how Zealand’s tax laws have changed—and what they could mean for your home sale.
Important! Before you put your property on the market, always consult a tax specialist regarding your property tax obligations.
Property tax laws in New Zealand
New Zealand property tax is subject to the intention rule and the bright-line test.
According to the IRD, there are four checks that will determine whether you will need to pay tax on a residential property:
- Your intent when you bought (the intention rule).
- Your history of buying and selling.
- Whether you’re in or associated with the property industry.
- Whether you buy and sell a property within ten years, or five years if the property was purchased on or after 29 March 2018 through to 26 March 2021.
The bright-line test
In November 2015, the New Zealand property tax laws were updated to include a bright-line test (often referred to as capital gains tax in all but name) on any residential properties bought and sold on within two years. The rule was intended to stop property speculators—namely investors—from buying up property and flipping it later for a profit.
It was hoped the new law would help take some of the heat out of the New Zealand housing market, particularly in Auckland.
In early 2018, this rule was extended from two to five years, then in 2021 this was extended to 10 years.
Are there any exemptions?
While the bright-line test applies to all residential properties, there are exemptions. These apply if your house:
- Is your main home.
- Was inherited.
- Is now under your ownership as part of a relationship break-up.
However, if your intention is to resell the home, you may be required to pay tax under the bright-line test.
Read more about the bright-line test exemptions here.
Let’s not forget the intention test
The intention test is all about the reason why you initially purchased the property. Specifically, if you purchase a property with the intention of selling it off later at a profit then you are required to pay tax on that.
For example, if you purchased an investment property and plan to rent it out while you wait for house prices to rise, you will be required to pay tax when you come to sell—regardless of when you bought the property.
Like the bright-line test, there are exemptions to the intention test, such as if the property is your main home. However, if you have a history of regularly buying and selling properties, you may be required to pay a tax. These circumstances are typically assessed on a case-by-case basis.
Case study A
Melissa buys a property with the intention of living in it until house prices rise in her area, where she will then sell it for a tidy profit. She has done this several times before. Seven years later, house prices rise in her suburb and she sells the home.
In this situation, Melissa will have to pay a property tax because she has a history of buying and selling property at a profit.
What if I have more than one intention, or if my intention changes?
Often there’s more than one reason for buying a property, and more than one reason for selling—and the IRD does take this into account.
As the IRD states: “It’s only when one of your specific reasons for buying a property is to resell it that any profit you make from the sale is taxable.” However, the intention to resell does not have to be the primary reason for the purchase.
Case study B
John buys a property with the intention of making it his family home and reselling it for a profit when the time is right. He has done this before with other homes he has lived in.
Four years later he changes jobs and decides to sell the home and move closer to his new workplace. However, because he bought the property intending to resell it—and is a habitual seller—he will likely have to pay a tax, even though he is living in the home.
If John did not have a history of buying and selling, or if his intention at buying was not to resell the property, he may not have had to pay a tax. However, because the resale was within five years, the bright-line test may still apply.
Case study C
Mary bought an investment property with the intention of renting it out for the foreseeable future. However, a change in circumstances means she has to sell the property off three years later. Because Mary did not intend to sell the property and is not a habitual seller, she is unlikely to have to pay tax under the intention rule. However, the bright-line test may still apply.
How does the IRD determine what my intention is?
The IRD can determine your intent by examining:
- Your buying and selling history.
- Discussions with your bank.
- Discussions with your real estate agent.
- Rental agreements.
- Any plans submitted to your local Council.
- Community involvement (for example: did your children attend the local school? What local club memberships did you have?)
- Utility bills (internet, power, water) as proof of residence.
- Whether the property is providing you with a source of income.
Summary
Selling a home is not always a clear cut affair when it comes to New Zealand tax law. Some situations are assessed on a case-by-case basis, so if you’re thinking of selling a property, always check with a tax specialist about what your tax obligations will be.
