Is this profit taxable?

[nzfrazer]

Just curious....at a wedding over the weekend I had a chat with a family friend who was telling me about a work colleague of theirs who had bought 2 sections. They were going to build 2 new houses, one to live in & the other to rent out.

Before they started a guy came along and offered them $25k more than they paid for each section which they accepted. Nice little $50k earner for no effort.

My immediate reaction was I think that $50k would be taxable. Their response was "don't you know there's no capital gain tax in NZ".

Maybe I'm wrong and it's not taxable as their intention was to live/rent the houses out? What do other PT readers think?

[Dean@Massiveaction]

If it was in their own name and they're not involved in PI then they wouldn't pay any tax.

[nzfrazer]

Sweet - nice little earner!

Presumably if they bought another 2 sections and someone came along offering them more and they sold again they would be a trader?

[Glen]

No tax at all?

What about at the end of the financial year and you're 'supposed' to declare income/earnings?

What would the scenario be then if you owned several properties under a LAQC, but then say purchased as they have done under your own name and not under the company, and then sold again.
Would this affect the buy and holds, taxwise.
....or would it depend on how often you did it?

[Dean@Massiveaction]

Yes Frazer. As soon as you established any pattern you would be classed as a trader in property. The scenario you explained really falls into the category of someone simply buying and selling their own home kind of thing. But as soon as you were trying to do it as a business it becomes tax evasion I would say.

I have heard of people moving into do ups, owning them in their own name, living in them for say 2 to 3 years and then onselling them and doing it again. This is non taxable but I wouldn't sleep well at night if it were me. I would feel like I was avoiding tax :-)

[CJ]

Agree that it is not taxable.

they had no intention of making a gain by reselling so no taxable gain there.
Not a trader so no gain there.

If they do again, they will need to be careful they are not deemed a trader based on history.

[Wayne]

I have heard of people moving into do ups, owning them in their own name, living in them for say 2 to 3 years and then onselling them and doing it again. This is non taxable but I wouldn't sleep well at night if it were me. I would feel like I was avoiding tax :-)

I would think 2 or 3 yrs would be more than enough time to live in one - I doubt that the IRD would see a pattern in that and class them as a trader. The average time in a house used to be 7 years so there must be many under and many over.

[CJ]

My opinion:

- 3 years you are probably safe. but if you have other property trading activities, this may work against you.
- 2 years would be borderline.
- 1 year risky
- less than 1 year dangerous.

I am sure the IRD has similar rules written down somewhere that they wont publish.

[captaincrab]

I'm not sure the IRD would agree its not Taxable. What if they dont believe these peoples intention was not to sell?

[CJ]

I'm not sure the IRD would agree its not Taxable. What if they dont believe these peoples intention was not to sell?

Proving stuff is always an issue.

However, you are likely to fly under the radar so the burden of proof isn't an issue. the more trades you do, the higher your plane flies.