When buying and selling a house, it’s important to understand what tax obligations you may be subject to. It can be daunting, particularly when the various types of tax are applied all at once.
We often get questions from property owners about tax for property sales and hidden costs associated with selling a property, so we thought it would be helpful to answer all of these questions in one convenient place.
What you need to sell a house
Before making any commitments, it’s crucial to have the best possible support and guidance when selling a house. On an official level, the New Zealand government recommends that you organise the following:
- A lawyer or conveyancer.
- A licensed real estate agent.
- A sale price in mind, as discussed with your agent.
- A basic understanding of property transactions. Your agent can help with this.
It’s recommended that you seek the services of a professional and qualified accountant. Selling a house is a big financial event and your tax obligations are very important. This article serves as supplementary information and not financial advice. You’re encouraged to seek this from a professional before undertaking any financial activity.
Tax implications when selling a house
For many of the queries we get from homeowners, there isn’t a simple one-size-fits-all answer. Unfortunately, tax and property law is complex and many different factors can impact what tax implications are applied.
For instance, a property developer who sells houses regularly will be taxed quite differently from someone selling their primary place of residence. To make sense of property tax, you need to know the following rules put in place for all New Zealand houses.
The bright-line property rule
With recent changes in 2022, many homeowners are wondering if they will be subject to the new Bright-Line property tax rules. The Bright-Line property tax was introduced in 2015 to tax income made from the sale of investment properties. It applies to investors whose main goal in selling is to profit, including New Zealand tax residents who buy residential property overseas.
The rule concerns any property bought and sold within the timeframe outlined by the government. As of 2022, the timeframe is 5 years for eligible new builds and 10 years for all other properties. In most cases, when a property is owned longer than those timeframes, it won’t be subject to the rule. Similar to a capital gains tax, the Bright-Line rule is calculated from the profit made. The difference between what the property was bought and sold for will determine how much tax is charged.
If you sell a property that is your primary residence or an inherited property, it won’t be subject to the Bright-Line rule. If you are the executor or administrator of a deceased estate, you are also exempt. The point of this tax is to target property investors who profit off the sale of secondary properties, not every day New Zealanders selling their main home.
The intention rule
An important factor of property tax is the intention with which the property was bought in the first place. That’s because properties bought for the purpose of resale will be assessed according to the ‘intention rule’.
If one of the main goals in buying a property is to resell it, it will be subject to tax on the profit made. This is known as the ‘intention rule’ which targets property dealers with a regular pattern of buying and selling property. It can apply to someone’s main home, but only if the pattern of regular resale is evident.
While they are often applied in similar situations, the intention rule is different from the Bright-Line property rule. The intention rule is applied according to the objective of the property owner, whereas the Bright-Line rule is defined by the 5 or 10-year timeframes of ownership put in place by the government.
Hidden costs of selling a house
While selling a property can be a lucrative opportunity, that doesn’t mean it won’t incur costs throughout the process. Once you know the above tax rules, you also need to understand that some common expenses can arise before, during, or after selling a house.
Agent fees
If you decide to sell your house with a real estate agent, you will need to pay for their services. These fees cover the listing fees, advertising costs, professional photography, and expert advice throughout the process. If you decide to sell privately without a licensed agent, you’ll end up paying for these services yourself or risk the house not selling for the desired amount. If you want to know more, you can read our blog about the cost of a real estate agent.
Lawyer fees
It is necessary to enlist the help of a lawyer or conveyancer when selling a property. Conveyancing is the process of ensuring a home is officially and legally transferred to the new owner and is essential to completing the home sale process. Of course, this does come at a cost but saves you money, time, and a lot of stress throughout the transaction portion of the sale. You can choose a lawyer that suits your budget, but it’s worth selecting one carefully, especially for complex transactions such as when selling a cross lease.
Rates and insurance
Right up until the house is legally sold, you’ll need to keep paying for rates and insurance. In many cases, there is a period where you may need to pay insurance for both your old and new house at the same time. Bridging the gap over the course of the transaction is important, but it can add up significantly, so we recommend being prepared for it before the property goes on the market.
Selling a house is an exciting opportunity, especially with the prospect of climbing the property ladder and making a profit. However, with all the tax implications and hidden costs involved, it can take its toll on a homeowner's bank balance and their stress levels.
To ensure the process is as seamless and profitable as possible, an experienced real estate agent is a must. The team at McDonald Real Estate know the Taranaki property market inside and out and can guide you through the process with ease. If you’re interested in selling your property and want to know more about the tax rules and best practices, talk to our team today.
We also have a wealth of resources you can take advantage of when listing your home, including a guide on how to prepare for sale. For everything you need to know about selling your property, download our free guides today.
