Tax calculation for new subdivide and build house

[imd6662]

Hi there


Can someone quickly point out to me the main considerations for working about the taxable gain on the sale of a property where we've subdivided off the back of an existing one and built. In particular, who do you take account of the cost of the land for the new house?

ta

[Rosco]

You need to provide some more information.

- what was your intention when you purchased the property?
- when did you buy the property (ie what year)
- Are you tainted? (builder, developer, trader, or associated to one?)
- Was the original house a rental or your personal house? or ???
- Have you sold the original house, or is it kept as a rental, personal house or ???
- It sounds like you have built on the back section. Have you then rented it? If so for how long? If not, is it on the market to sell or ???

Quick calculation if you have purchased with intention to subdivide and sell. Then you have sold both.
1) GST - If you are in the business of doing this, and it is more than a one off, then you would most likely need to GST register. So you would cliam GST on the purchase, claim on expenses, then pay GST on the sale. For a profit calculation you use GST exclusive figures.
2) If this wasn't a taxable activity(maybe a one-off), then no GST to consider. So sale values less expenses (including purchase of property), will give you the profit.

There are quite a few scenario's that your's could be, so I have answered 2) as a guess at your scenario.

Ross

[imd6662]

Thanks Ross. You,re right I should have been plainer and I suspect you've guessed right about most things.

- Bought last year with intention of subdividing and building
- Not rainted as I know as not developers, builders, traders and this is a first time
- original house was and is a rental, undecided about selling or not
- new house is curently the in the market

[spaceman]

Ummmmm..........

Sale price - costs = profit ...... profit is taxed


Cheers
Spaceman

[Rosco]

Existing house is technically taxable if sold(doesn't matter how many years you hold for, ie no 10 year rule etc), as it was purchased with the intention of selling for a profit.

If you did keep this as a long term rental, IRD would probably be happy with long term capital gain, if held long term (like at least 10 years).

If you wanted to work on the profit on each part, or if they are sold in different tax years. You need to split the cost of the whole property. So look at a valuation or rates values, and work out what % is land and what % building. The building obviously only relates to one site, and this will just be your purchase price multiplied by the % for the building. With the land, you need to work out a split based on land size and realistic values of each.

As you are selling the back section and build first, you want this land value to be as high as possible to reduce any profit and therefore tax. But the split still needs to be realistic, and this may be that the land on the front section is worth slightly more.

If you are looking at doing your own taxes, I would suggest you complete this calculation, then get a Chartered Accountant to review it, and your tax return.

Ross

[imd6662]

Thanks Ross.

Our main task will be to work out a fair price for the land for the new house. I think your suggestion is to basically prorate the new section size as a porportion of the land component of the original purpose. However since new titles have been issued the council have setg a land value for the new property -- can I just use that?

Know any good accountants? .... just kidding

[Rosco]

sorry you can't use the new land value.

It needs to be based on the cost, which could be substantially less.

Ross