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Income Tax Act 2007

Timing and quantifying rules - Allocation of deductions for excess residential land expenditure - Interposed entities

EL 20: Allocation of deductions related to bright-line disposals of residential land

You could also call this:

“How to claim expenses when you sell a house quickly”

This part of the law talks about how you can deduct costs when you sell residential land quickly. It applies when you make money from selling residential land within a certain time and you’re allowed to deduct some costs.

The amount you can deduct in a year is limited. You can only deduct up to the amount you made from the quick sale plus any other money you made from land that year.

If your costs are more than this limit, you can’t deduct them all right away. You have to wait and use them in a later year when you make money from land again.

If you sell the land to someone you know (like a friend or family member), there are special rules. You can only deduct up to the amount you made from the quick sale. If your costs are more than this, the person you sold to can use the extra amount as part of their costs for buying the land.

When the law talks about income from land, it means money you make from selling land in general, not just from quick sales.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=LMS223711.

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Part E Timing and quantifying rules
Allocation of deductions for excess residential land expenditure: Interposed entities

EL 20Allocation of deductions related to bright-line disposals of residential land

  1. This section applies for an income year when a person—

  2. derives income under section CB 6A (Disposal within 2 years: bright-line test for residential land); and
    1. is allowed a deduction under section DB 23 (Cost of revenue account property) in relation to the land.

      1. The amount of the deduction that may be allocated to the income year must be no more than the amount calculated using the formula—

        bright-line income + net income from land.

        Where:

        • In the formula,—

        • bright-line income is the amount of income that the person derives for the income year under section CB 6A:
          1. net income from land is the amount of net income that the person would have for the corresponding tax year if their only income were income under sections CB 6 to CB 14 (which relate to amounts derived from the disposals of land).

            1. To the extent to which the amount of the person’s deduction is more than the amount calculated under subsection (2), the excess amount is—

            2. suspended as a deduction for the income year; and
              1. carried forward to a later income year in which the person derives—
                1. income referred to in subsection (1)(a):
                  1. income under sections CB 6 to CB 14; and
                  2. added to the amount of the deduction referred to in subsection (1)(b) for the later income year.

                    1. Subsections (6) and (7) apply when a person disposes of land described in subsection (1)(a) to an associated person.

                    2. Despite subsection (2), the amount of the person’s deduction for the income year of the disposal must be no more than the amount of the bright-line income referred to in subsection (3)(a) that they derive from the disposal.

                    3. To the extent to which the amount of the person’s deduction under subsection (6) is more than the bright-line income derived by the person, the excess amount is treated as expenditure of the associated person incurred in acquiring the land.

                    Notes
                    • Section EL 20: inserted (with effect on 1 April 2019), on , by section 62(1) (and see section 62(2) and (3) for application) of the Taxation (Annual Rates for 2019–20, GST Offshore Supplier Registration, and Remedial Matters) Act 2019 (2019 No 33).
                    • Section EL 20(1)(a): amended, on , by section 127 of the Taxation (Annual Rates for 2023–24, Multinational Tax, and Remedial Matters) Act 2024 (2024 No 11).
                    • Section EL 20(1)(a): amended (with effect on 27 March 2021), on , by section 48(1) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                    • Section EL 20(3)(a): amended, on , by section 127 of the Taxation (Annual Rates for 2023–24, Multinational Tax, and Remedial Matters) Act 2024 (2024 No 11).
                    • Section EL 20(3)(a): amended (with effect on 27 March 2021), on , by section 48(2) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).