Posted on April 27, 2016
The IRD has recently published a draft ruling regarding “regular pattern” involving disposing of land.
Question
There are exclusions from the land sale rules for your home or residence, but these may not apply if you have a “regular pattern” involving disposing of land. What is a “regular pattern” for those rules?
Answer
You will not be able to use the exclusion from the land sale rules for your home or residence if you have a “regular pattern” involving disposal of property that you lived in. Whether you have a “regular pattern” involving disposing of property that you lived in 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.
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 sufficiently uniform or consistent intervals.
For a “regular pattern” involving disposal of property that you lived in to prevent you from using the home or residence exclusion, you have to have engaged in the regular pattern independently of and before the transaction in question. The transaction being considered as potentially subject to tax is not taken into account in deciding if you have a regular pattern of such transactions.
There is a cap on how frequently you can use the main home exclusion from the 2-year “bright-line” rule. You are not able to use that exclusion if you have already used it twice in the two years before the “bright-line” date for land you are selling. This cap applies even if you do not have a “regular pattern” of acquiring and disposing of residential land.
The draft ruling also provides more detailed explanation and examples regarding the above issues, read on here. The deadline for comment is 30 May 2016.