Subdividing Land Initial Tax Implications to Consider

--- Brent Wise

--- Brent Wise

It is important to consider the tax implications of subdividing a piece of land which can have important consequences and need to be fully understood.

When you sell subdivided land the profit arising may be a capital gain or ordinary income, depending upon the circumstances and your intention.

If you subdivide a block of land – such as the land on which you live and sell the newly created block, any profit that is generated by these actions is treated as a capital gain and subject to capital gains tax.

But depending upon the circumstances any profit is treated as ordinary income (not a capital gain) if both the following are present.

Your intention or purpose of entering the transaction was to make profit or a gain in some form.

You entered into the transaction and the profit was made, in the course of carrying on a business or carrying on a business operation or a commercial transaction.
It is important to note that for your profit to be treated as ordinary income you do not need to be operating a business as long as there was a profit motive.

Finally, it is important to note that capital gains tax will not result at the time of subdivision but when you sell the subdivided blocks.

The above is some tax implications based on present legislation and no financial advice is given, such decisions need to be made on consulting a financial advisor.