Over the last few years, the bright-line test has become increasingly complex, with different rules that apply depending on when you purchased your property.
If you own a residential property or have plans to buy one, it’s important to have a basic understanding of the bright-line test (and how it affects you) to avoid being caught out with an unexpected tax bill.
In this article, Nicole McBirney explains what the bright-line test is, who it applies to and what the exemptions are.
What is the bright-line test?
The bright-line test was introduced in 2015. As a result, some residential property owners now have to pay tax on gains made when selling their property.
When the test was initially introduced, it only applied to properties bought and sold within two years, but that timeframe was extended to five years in 2018.
In March 2021, the government announced that the bright-line period would be extended to 10 years for property acquired on or after 27 March 2021.
This has complicated the situation, as it means there isn’t one blanket rule that applies to all property sales – the rules vary depending on when your property was purchased.
Who does the bright-line test affect?
The bright-line rules only apply to residential property, so the test doesn’t affect commercial property or farmland.
If you own residential property, the first thing to consider is when the property was purchased:
- If the property was purchased on or after 27 March 2021 and you sell it within 10 years, the bright-line test will apply to the sale (unless you’re covered by an exemption, as detailed in the section below)
- If the property was purchased between 29 March 2018 and 26 March 2021 and you sell it within five years, the bright-line test will apply (unless you’re covered by an exemption)
Note: although the bright-line test only affects residential land, any properties used for short-stay accommodation (where the owner doesn’t live on the property) are subject to the bright-line test. Properties used for this purpose can’t be excluded as commercial premises.
What are the exemptions?
There are four exemptions to the bright-line test. If one of these exemptions applies to you, you won’t be liable for bright-line tax when selling your property:
- Sale of the main family home
- Transfer of property to estate executor(s) or administrator(s)
- Transfer of the property after the owner’s death (via sale or inheritance)
- Relationship property transfers (e.g. a transfer following a separation)
How does the main home exemption work?
The main home exemption differs depending on when you bought your property:
- If your property was purchased on or after 27 March 2021, bright-line tax may apply if the property wasn’t used as your main home for the entire time it was owned. The tax payable will be calculated by the proportion of time the property wasn’t used as your main home. If the property wasn’t your main home (e.g. it was rented out) for periods of 12 months or less , you may be exempt from bright-line tax.
- If your property was purchased between 29 March 2018 and 26 March 2021, the existing main home exclusion rules will apply. In short, this exclusion applies on an all-or-nothing basis. If the property was used as your main home for most of the bright-line period (i.e. more than 50% of the time you’ve owned the property), you won’t be liable for bright-line tax.
The main home exemption can’t be used more than twice in the two-year period leading up to the property sale. It also can’t be used if you have a regular pattern of buying and selling your main home.
How does the bright-line test affect new builds?
New builds acquired on or after 27 March 2021 are subject to a bright-line period of only five years, as long as a code compliance certificate (CCC) for the build has issued before you sell the property.
You won’t qualify for the new build bright-line test if:
- The property is sold as a section (with no new build and CCC)
- You purchased the new build more than 12 months after it received CCC
Although new builds only have a bright-line period of five years, all other standard bright-line rules apply.
New builds also have the benefit of interest deductibility. This means you could claim interest relating to the new build as an expense against your income from residential property (although it’s important to seek accounting advice regarding this).
Note: when you’re purchasing a standard property (i.e. a property with an existing house), the date of acquisition for bright-line purposes is the date of transfer of title, not the date of the agreement. However, when you purchase a property off the plans, the date of acquisition will be the date recorded on the sale and purchase agreement for the purchase (and the date of disposal is the date recorded on the agreement for the sale).
Does the bright-line test affect property transferred into a trust?
If you transfer your property into a trust and aren’t covered by any exemptions, you may be affected by the bright-line test.
Even though you might not sell the property to the trust, the transfer will be deemed a ‘disposal’ for tax purposes, so tax will be payable if you’re within a bright-line period.
The transfer date will also become the start of a new bright-line period. If the trustees decide to sell the property within the following ten years, tax may be payable on that sale.
It’s important to consider your long-term plans for the property before any transfers are made. In many instances, the benefit of having the property in a trust (e.g. protection from relationship, creditor or business claims) will outweigh the tax consequences of the bright-line test, but it’s important to seek advice from an accountant and weigh up the pros and cons.
What does rollover relief mean?
Rollover relief allows you to change how the property is owned without triggering the bright-line rule. Essentially, you are treated as having purchased the property at the same time (and for the same price) as the person you received the property from.
The current rollover relief is available for transfers under a relationship property agreement, upon death and company amalgamations (mergers and acquisitions).
For land sold or transferred from 1 April 2022 onwards, further rollover relief has been applied for:
- Transfers to or from a qualifying trust
- Look-through companies and partnerships
- Māori collectively-owned land
When should I seek advice?
We suggest you seek tax advice from an accountant if any of the following apply to you:
- You’re intending to change how the property is used (e.g. you’re planning to use it for something other than your main home for more than 12 months)
- You’re planning to undertake a profit-making scheme or development
- You’re a builder or land dealer
- You’re planning to claim a tax deduction on the acquisition of the property
- You’re helping your children into their own first home and you’ll be a co-owner
You should be aware that any profit from a gain in property value is considered taxable income, which may affect other obligations or entitlements based on income, such as student loan repayments, child support payments and Working for Families. If you’re concerned about this, it’s important to speak with an accountant.
Parents trying to help their kids into homes should be aware they could be caught out by bright-line tax. If land is sold or gifted for a sum below its market value when it would otherwise be subject to tax, the transaction will be deemed to take place at the market value at the time of the sale. Our property law team can help you figure out the best way to structure this type of transaction.
If you need any help navigating the bright-line rules, please get in touch with us on enquiries@armstrongmurray.co.nz or 09 489 9102.
This article is brief and general in nature. You should not treat it as legal advice and should seek professional advice before taking any action in relation to the matters dealt with in this post. Armstrong Murray accepts no liability for losses suffered by any person or organisation who may rely directly or indirectly on this post.
