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Bright-line test – Tax rules covering residential property

What is the bright-line test?

From 1 October 2015, if you buy and sell a residential property within two years, this test is used to determine if you are required to pay tax on the profit. The test does not apply commercial property or farms.

 Why was the bright-line test introduced?

Some would suggest as a tool to slow down the housing market and some would say a tax grab but basically there is no capital gains tax in NZ at present. Currently there is an “intention test” in the land sale rules that makes gains from the sale of property purchased with the intention of resale, taxable.  The problem with this is that intention is hard to prove (or disprove) so can be time consuming and expensive for Inland Revenue to enforce.  The bright-line test supplements the intention test with a more certain set of rules.

 When is the start and end of the two year period?

The two-year period will run from the date of acquisition to the date of disposal.

The date of acquisition will generally be the date the title is registered with Land Information New Zealand, whereas the date of disposal is the date a sale and purchase agreement is entered into.

Where there is a sale of the right to buy a property, including sales “off the plan”, the bright-line period will run from the day that a person enters into the contract to purchase the property, to the date that a person enters into an contract/agreement for the sale of the right to buy the property.

What are there any exemptions to the bright-line test?

The primary exception to the proposed bright-line test is the main home exemption.  This exemption applies when:

  • The land has a dwelling on it;
  • The dwelling is occupied mainly as a residence by the owner; and
  • The dwelling is the main home of the owner – main home meaning you use the property the majority of the time (i.e. you cannot have two main homes).

Other exemptions include:

  • Inherited property (not subject to the bright-line test).
  • The transfer of property under a relationship property agreement would also not be subject to tax under the bright-line test.  However, any subsequent sale of property transferred under a relationship property agreement may be subject to the bright-line test if the disposal is within two years of the original acquisition and the property was not the transferee’s main home.

Multiple main home sales within two years

The main home exemption will not apply to a sale if, within the two years immediately preceding the date of disposal, that exception has applied to two or more other sales by the same seller.

My home is owned by my Trust – what is my position?

Unlike the new property tax information rules, residential land owned by a trust can qualify for the main home exception, but only if both:

  • The trust-owned property is the main home for a beneficiary of the trust; and
  • The principal settlor of the trust does not personally own a main home (the principal settlor being the person who has settled the most property, by value, on the trust).In addition, if the principal settlor is a beneficiary of the trust and the trust owns the property that is the settlor’s main home, the main home exemption applies only if it is that dwelling which the trust is selling, not another dwelling owned by the trust in which another beneficiary resides.

What if you sell a property at a loss?

Losses arising only as a result of a sale of property being caught by the bright-line test are ring-fenced. What this means is that the losses can only be used to offset taxable gains arising under the land sale rules in the future (if any).

To avoid ‘skullduggery’, a person would not be able to recognize a loss on property under the bright-line test that has arisen from a transfer of property to an associated person.

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