Stricter rules for property investors

Date: 6th August 2019

If you’re in business or real estate investment, you probably loved monopoly growing up. Maybe you had it figured out too. Barter or buy to get the orange street and the railway stations, build hard and fast, and sit back and watch the dollars roll in as the triumphant owner of the highest-yielding properties. But the iconic household favourite also had rules that needed to be adhered to, taxes to pay, and laws of the game. For many of us, knowing how the game worked was what made it fun. Everyone knows the real opportunities lie in understanding the name of the game.

monopoly board game

In essence, Monopoly was pretty similar to playing the property game in real life. While your Monopoly days may be over and you now trade in houses with a physical address and more diverse paint job, the game is the same. By keeping up-to-date with changes to the rules, paying appropriate taxes, and abiding by the law, you can invest in property today as happily as you did as a child. Although, hopefully with no stints in ‘jail’…

Property investment rule changes

New Zealand is changing the rules of their property investment game however, and for those in the business, it’s important to get ahead of the new rules. Inland Revenue is actively pursuing real estate investors to tax people who are speculating on property investment. Although New Zealand does not have a capital gains tax, the IRD has announced a plan to install a notification system on property transactions to let them know when they may levy a tax on realised capital gains.

From 1st January 2020, “virtually all people buying and selling properties will be required to put their IRD number on land transfer documents”. This requirement includes the transaction for a buyer or seller’s main home (IRD number is currently not required), allowing the IRD to track the sale.

The bright-line test

The bright-line rule was introduced in October 2015. The IRD offer the following simple definition of the rule, “It says you’ll pay tax when you buy and sell a residential property within five years, unless an exclusion applies”.

The key exception is when the property can be classed as your “main home” that you have actively used more than 50% of the area for more than 50% of the time you’ve owned it. If you buy/sell your main home more than twice within a two year period however, it will trigger the bright-line rule, and you will be forced to pay tax on any profits from the third sale.

Inland Revenue says: “Enforcing the bright-line rule is a priority among those working on property compliance and they’re following a comprehensive strategy designed both to help customers meet their obligations from the start and to catch the cases where no profit is declared from a sale.”

Who will pay capital gains?

Many investors within the Queenstown Lakes region who buy and sell property, even when owner-occupied, could be caught by the new rules. So keep in mind that:

  • You can only use the main home exclusion twice over any two-year period. You’d have to pay tax on any profit you make from the sale of a third property in two years because you would not be eligible for the main home exclusion.
  • You’re also not eligible for the main home exclusion if you show a regular pattern of buying and selling residential property. People who are in the business of building – like home builders, carpenters, and other tradespeople, and particularly those in Auckland and Queenstown, will be under the spotlight and have to be very careful with property investments.

We’ll leave you with this final word from Richard Owen at Inland Revenue: “property speculation is a centre of attention, especially in and around new developments, infill housing, regional hot spots and properties that have been sold within a short duration.”

More information

New Zealand Herald article – Home sellers will be required to give IRD numbers to stop avoidance of brightline tax

IRD news article – Inland Revenue firmly focussed on bright line

If you need advice on your tax obligations in regards to investment property, please contact us.

Posted in: investment property, ird, Latest News, Queenstown, Wanaka