Updated: Mar 31, 2020
If you subdivide a property within 10 years of purchase, then it can be subject to income tax. There are exclusions to this if you are subdividing your personal home or subdividing to creating more rental income. So, this article only applies when those exemptions do not.
If the exemptions aren’t relevant to your situation, then income tax will apply if the subdivision is begun within 10 years and is not minor. This is particularly relevant if you subdividing a rental property to sell as no exemption would apply. The question then becomes, is your subdivision just minor?
The IRD have recently issued an interpretation statement covering what constitutes a minor subdivision.
Here are the 4 examples included:
Example 1 - Straightforward subdivision of a farm
Joe owns a 75-acre farm he purchased 6 years ago. In addition to the house he lives in, an old farm house is situated at one end of the property. Joe decides to subdivide off the old farmhouse and 2 acres of surrounding land.
A valuer estimates the value of the property to be $750k. Survey & legal work is straight-forward so it costs $15k to do the simple division of one lot into two. No physical work is required as an existing fence already separates the property. The farmhouse & 2 acres is sold for $795k. This subdivision is minor as the cost was small (2% of value), the professional services were straightforward and no physical work was required.
Example 2 - Subdivision with extra work required
Lisa purchased 10 acres of land 7 years ago for $500k. She began to build her home but building costs blew out and she decided to subdivide to help finance the home, one 3 acre lot with her home and one 7 acre lot to sell. Lisa needed a surveyor, lawyer, engineer, fencing and site clearing which cost $50k. The 7 acre block is sold for $700k. This subdivision is not minor as the cost was significant in absolute and relative terms (8% of value), several professional services were used and physical work was required.
Example 3 - Non-straightforward subdivision
Sarah purchased a house on a 1 acre section 6 months ago for $1m. It was going to be rented out but Sarah changed her mind and will subdivide into 4 lots and sell them. Legal work is required for the shared driveway and storm drain easements which cost $13k.
Sarah has a landscaping company that clears bush and undertakes earthworks and doesn’t charge Sarah for the work. Sarah’s brother creates the driveway for a discounted cost of only $5k. All 4 lots are sold for $1.6m. This subdivision is not minor despite the low cost (2% of value) as the professional work was complex, extensive physical work was undertaken including earthworks changing the nature of the land.
Example 4 - Boundary Adjustment
Grace has a quarter acre property worth $750k that she is selling but finds out from a valuation report that she had been mistaken about where the boundary was. This resulted in Grace’s garden extending a little over the boundary into her neighbours. Grace negotiates with her neighbour to adjust the boundary for $6k. The only work is straightforward survey and legal work at a cost of $5k. This subdivision is minor as the cost was small, the professional services were straightforward and no physical work was required.
Hopefully the above examples have given you an idea of the low level of cost, complexity and physical work that needs to be involved in order for the subdivision to be only minor.
So, if you have owned a rental property for less than 10 years that you are thinking of subdividing, I recommend that you seek advice regarding the tax implications. It could be very beneficial if your subdivision can be minor so that no income tax is payable on the sale.
Disclaimer: The above article is general in nature and we recommend you seek professional advice tailored to your specific personal situation.