Land sales – when is the residential exemption not available?

There has been a lot of discussion about the taxation of land sales and the introduction of the new two-year bright-line rules. Generally speaking, if you buy a property and sell it, even if it might be subject to one of the various land taxation rules, if you have used the property as your home, there is an exemption available that may exclude you from paying tax on any gain. The bright-line rules, of course, only allow such an exemption to be claimed twice in any two-year period. This limit applies even if you do not have a “regular pattern” of acquiring and disposing of residential land.

Even if you live in a property, however, and the exemption may appear to be available, if you have a regular pattern of buying and selling residential houses that you have lived in, the exemption is not available to you.

The question that therefore arises is what amounts to a regular pattern of buying and selling?

The IRD has given an indication of its view on when you have a regular pattern of buying and selling which would stop you from claiming the exemption. Whether you have a “regular pattern” of transactions that will mean you cannot use the relevant exclusion will depend on the number of similar transactions and the intervals of time between them. It will be a matter of fact and degree whether you have a regular pattern of such transactions. There is no hard and fast rule about the number of times or how frequently you can buy and sell, build and sell, or renovate and sell houses that you live in and not be taxed. The IRD has suggested however, that generally at least three prior transactions would be needed for there to be a regular pattern.

For there to be a “pattern” there has to be a similarity or likeness between the transactions. The reason or purpose for each transaction is irrelevant; it is the similarity of the transactions that is important. For a pattern to be “regular”, the transactions must occur at uniform or consistent intervals. The transaction being considered as potentially subject to tax is not taken into account in deciding whether you have a regular pattern of such transactions.

There have been people who have moved frequently because circumstances change (parents become ill, employment opportunities arise, family members need medical care of a particular kind etc.) If, as a result, you change houses more than three times in a comparatively short period, you may find that when you come to sell your fourth home, any gain on sale could be taxable. This is because even though you have had sound personal reasons for making the moves each time, the purpose of the transaction (the reason you have sold) does not change the outcome in terms of a regular pattern of buying and selling houses.

This area of taxation is still a minefield and we will all need to tread carefully when we work through whether a sale of a property will need to be dealt with for taxation purposes. Therefore, it is important to tell your accountant and/or business or taxation adviser about any land sales in a taxable year, even if you think it is your own home, as there may be a tax cost that you need to deal with.

If you have any questions on this topic, please contact your local Crowe Horwath tax adviser.