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If you're buying a rental property you'll have to pay tax on the rental income you earn. You may have to pay tax when you sell the property as well.
The tax you pay depends on four things:
- Your intent when you purchased.
- Your history of buying and selling.
- Whether you're in or associated with the property industry.
- Whether you buy and sell a property within two years.
It's your intention when buying a property that matters
If you bought to rent, with no firm intention of selling, then you're unlikely to have to pay tax on the profit from a sale.
However, if there are several reasons for buying a rental and if one of these is for resale, you'll have to pay tax on any profit from the sale as well as the rental income. This is regardless of how long it's been since you purchased the rental.
Your history of buying and selling counts
If you have a history of buying and selling property then you may be a property dealer and will have to pay tax when you sell your property, even if it was your family home. If you're unsure whether you may be a property dealer you should seek advice from a tax advisor.
If you're a dealer, developer or builder
If you're in the business of dealing in land, a builder or developer, then income from property purchased as part of that business is taxable in the normal course of business. There are also additional rules for other land that you deal with outside your business which is sold within 10 years.
If you purchase property - either as:
- part of your property business; or
- as part of your building business and you make improvements to the property
you will be liable to pay tax on the profit when you sell the property. This is regardless of whether you're still in business or not.
Selling within 10 years
If you're a property dealer or developer you will be liable for tax if you sell a property within 10 years of purchase. This is regardless of whether the purchase is part of your property business or not.
If you're in the building business you will be liable for tax on property that you sell within 10 years of having completed building work on the property. This is regardless of whether you hired someone else to do the building work or not, and regardless of whether the property purchase was part of your building business.
If you're associated with a dealer, developer or builder
If you're associated with someone in the property industry - you're an "associated person". This means you may have to pay tax on all or some of your property transactions, even if you're not personally a property dealer, developer or builder.
These transactions include tax on the sale of a property if you had an association with:
- a property dealer or developer when you brought the property
- a builder when significant improvements started on a property.
The associated person rules changed for land acquired on or after 6 October 2009, and the definition of what's meant by some associations has widened. For more information about associated persons and property transactions, read these guides:
- Tax and your property transactions (IR361)
- A guide to associated persons definitions for income tax purposes (IR620)
You buy and sell a property within two years
The bright-line test only applies to properties bought on or after 1 October 2015.
If you buy and sell a residential property within two years, you'll pay tax on the income you earn from the sale. This is regardless of your intention at the time of the purchase. A withholding tax may also be deducted at the time of sale.
If I buy a property as a rental I won't have to pay tax when I sell.
What the law says: This isn't always the case. You'll have to pay tax on any profit you make from the sale if:
- selling was one of your intentions when you bought the property, even if it wasn't the main reason for purchasing the property, or
- you're associated with the property industry - for example you're a builder, developer or dealer or you're associated with one.
You should get professional advice from a tax advisor if you're considering selling.
What happens when there's more than one reason for buying a property?
Joe and Gail
Joe and Gail buy a second property as a rental. While they hoped that in the long-term, the property could be sold for a profit if needed, their reason for buying the property is for rental income. They hadn't decided to sell the property at the time they bought it.
In this case, they have to pay tax on the rental income. They also have to pay back any depreciation that they claimed against the property before April 2011, if they sell it for more than its depreciated value. However any profit from the eventual sale of the property is unlikely to be taxable.
Frances and Bruce
Frances and Bruce buy a second property in the hope that it will quickly gain in value. They decide to rent it out in the meantime.
One of their reasons for buying the property is to sell it and make a gain from any increase in its value. When they do sell, they must account for the profit in their annual IR3 tax returns.