Income from Property is an area that can confuse property investors. We do not as yet have a capital gains tax and speculators and dealers in property often treat their income from property as a capital gain and do not declare it as income. Most do not believe that any tax on the sale of a property should be paid but this is not always the case.
The IRD focus is on potential property speculation such as land banking, off-plan sales and property swaps. They use a targeted audit system to alert them to property transactions by customers who continue to be non-compliant; the system monitors the properties for future activity. They can also identify instances of masked ownership of traded properties – which constitutes evasion. Sometimes a tax customer fails to do the right thing accidentally by not realizing the tax obligation exists. The best practice is always to ask, either the IRD, or a professional adviser and if you have overlooked tax then a voluntary disclosure is the best option.
Some of the factors to consider when determining whether or not tax on the sale of a property is payable include:
Most property investors reluctantly acknowledge that they have to repay depreciation claimed if they sell their investment property for a profit, but many don’t believe they should pay income tax on the profits. It all comes down to your intent when you purchased. If you purchased an investment property with the intent to keep it long term and generate income from the rental then you don’t have to pay tax on the profits. If however you developed the property or bought it with the intent of selling it for profit then you would be considered a property dealer and would need to pay tax on your income. The IRD will also take into consideration other factors such as the length of time you owned the property and the number of properties you have bought and sold.
The situation can be further complicated by the associated persons rules. Even if you were not a property dealer yourself you could be tainted by a partner, trust or business you are involved in if they have property dealings. It can be difficult to understand the complexities of the tax legislation so it is best to seek advice from your accountant on these issues.
Ignorance is not a defense, it is your responsibility to find out your tax obligations. You need to do your homework and get advice on whether or not you need to pay tax on the sale of a property. Its far better to do so at the time than have IRD come after you later on and impose additional penalties. Anyone can make a voluntary disclosure and it is the only option if you discover you have made an error or filed an incorrect tax return. Remember the old saying you cant escape death and taxes! So contact us on 639 1004 today to discuss whether or not you need to pay tax on your property dealings.