The sale of a property can be taxed in one of three ways:
- Carrying on a business – For example, a property developer building and selling apartments. This is taxed as normal business income.
- Mere realisation of a capital asset – For example, an investor selling their rental property after five years. This is taxed as a capital gain with the 50% general exemption applying if the asset was owned for more than twelve months.
- Profit making undertaking – For example a home owner subdividing their back yard and building a unit for sale. This is taxed as a gain or loss on sale.
The most tax effective of the three property related transactions is the mere realisation of the capital asset, as the 50% general exemption applies. In addition, if the property was purchased pre-CGT (i.e. before 20th September 1985) then the gain is capital gains tax free.
For the mere realisation of a capital asset method to apply the taxpayer needs to basically sell the asset without adding any value to it. Examples of this include:
- A home owner subdividing their backyard and selling a vacant block of land.
- A farmer subdividing part of the farm and selling it off to reduce debt, fund other investments, or reduce work commitments.
- An investor selling a vacant block of land that was purchased for long term gain.