Case scenario: In 2018, Lilly and Sam (who are husband and wife) purchased a section of land in Manakau (New Zealand) for $480,000. They planned to build a home that they would live in when they both retired in 2020. Sam is a builder, so he spent his weekends building a new home on the Manakau section. In total, Lilly and Sam spent $500,000 building the house, which was completed in February 2020, and they move into the new house in March 2020. However, as a result of the COVID-19 lockdown, Lilly and Sam decided that they would prefer to retire in a location closer to their children who live in central Otago, so they sold the house in February 2021 for $1.2 million and moved to Wanaka. This is the first time Lilly and Sam have built and sold their own house.

Questions:

1. Explain whether the gain made on the sale of the property in Manakau is income to Lilly and Sam under sections CB 6A through to CB 14 of the New Zealand Income Tax Act 2007. Include reference to any applicable exclusions in your answer.