Tax on sale after subdivision of long term rental property?

[markstewie]

Hi everyone,

I have a tax question if anyone here can help!?

We bought a property in Auckland in 2011. It was configured as a big five bedroom villa at the front, and a small minor dwelling at the back. We have rented both independently since we bought it.

After the introduction of the unitary plan we realised we had the opportunity to subdivide the property at put each dwelling on its own title. We started this work in 2019 and completed it in early 2021. New titles were issued February 2021. We spent around $200-250k on subdivision works. And another $100k+ on renovating the two properties while they were vacant.

So the question is if we sold one or both of the properties, would we be liable for any taxes on sale? I think we would be ok for brightline as even though they are new titles we have owned the property since 2011. Correct?

However would IRD now classify us as developers? And potentially tax us on any proceeds from sale over and above the perceived value of the properties when the new titles were issued? Or is this not a problem either?

This is the only subdivision we have ever done (i.e. we are not prolific developers) and we hold other long term rental properties.

Are there any other tax considerations?

Many thanks,
Mark

[Perry]

With such a range of complexities, methinks you should be asking an accountant who specialises in property.

It might cost, but it would - at least - be a qualified opinion.

[donna]

Yes ditto what Perry says - get advice from a property accountant like GRA - their banner is above - and they do what you've done as an investment strategy.

I'd be interested to know the answer too as many investors here may also be in a similar situation where they too can subdivide etc. I guess there may be more than one answer e.g. subdividing family home and second dwelling vs. two rentals.

By the way - how large was your section before you subdivided and how much was the process to get the fee simple titles?

Thanks

Donna

[markstewie]

Hi Donna, yes we are booked in to talk to another accountant to get a second opinion.
Our normal accountant said that what will happen is that the IRD will place a value on the two new titles at the time the titles were issued and then the difference between the sale price and their value will have GST charged on it when we go to sell.
We just want a second opinion if this is accurate and how IRD would come up with the value at the time the titles were issued. I can't even imagine how they could do this accurately for our property. Also, if we would be classified as a developer at all as we've only done this once on a long held property. Also would it taint any other sales of our other long held properties if we did sell one of the subdivided ones.
I'll update once I've talked to the other accountant if I remember.
Cheers, Mark