Income Tax on Re-Zoning Property Gains
A rarely used tax law is now more likely to used by the IRD with some property owners standing to make profits on properties due to be re-zoned under the Auckland Unitary Plan.
This tax law means that income tax applies to the profit made on a property sale if it is sold within 10 years of purchase and at least 20% of that profit is due to a resource consent granted (ie subdivision) or a re-zoning change or even from the likelihood of a resource consent being granted or the likelihood of a re-zoning change.
Lets say that, 5 years ago, you purchased a property for $500k and that it was worth $800k now. A change to the Unitary Plan or a resource consent application means that the property is now worth $1m. Because the increase from the re-zoning of $200k is more than 20% ($200k/$500k = 40%) of the profit of $500k, income tax would apply to the entire profit.
The subjective issue with this tax law is how to calculate the portion of the profit that arises from the resource consent or re-zoning. To determine that amount, it would be ideal to arrange for a registered valuation just before sale with two values, one with the potential at the time of sale and one without the potential at the time of sale.
There is an exemption that applies to this tax law which applies if the property was purchased and used as a family home or farm, and the property is sold to another person that will also use the property as a family home or farm.
So, if the property is sold to a developer or investor, then that exemption won't apply. The exemption may not also apply if the property is owned under a trust as a trust may not be able to use the property as a 'family home'.
If the tax law does apply and the exemption does not, then income tax will apply to the entire profit, not just the profit from the resource consent or re-zoning.
However, the profit is reduced by 10% for each full year that the property was owned. So, in the earlier example, the profit would be reduced by 50% ($250k) due to the 5 full years of ownership so income tax would only apply to $250k.
So, if you have a property that may benefit from a resource consent or re-zoning change, the I recommend you talk to us. The next step would be to get a registered valuation showing as little difference between the property value with and without the potential for change.
Disclaimer: The above article in general in nature and we recommend you seek professional advice tailored to your specific personal situation.