The most recent Government amendments to the bright-line test now makes the bright-line rules applicable to many more individuals. In this article, we will touch on the rules you need to be aware of when purchasing residential property and whether the bright-line test will apply to you.
What is the “bright-line” test?
The bright-line test is a rule in the Income Tax Act 2007 aimed at taxing financial gains made on residential investment properties that are sold within the bright-line period.
On 23 March 2021, the bright-line period was extended from five years to 10 years. This means that many residential properties, if disposed of within 10 years of acquisition, will be subject to income tax on any profit made.
Any property acquired before 27 March 2021 will still fall under the previous rules, with tax potentially being imposed on properties disposed of within 5 years of acquisition.
Will my Property be Subject to the Bright-Line Rules?
It is important to be aware of whether your property will be subject to income tax under the bright-line rules, as well as consider the implications so that there are no surprises when you come to sell.
We list the following which are common exemptions/exclusions to the bright-line rules:
- When a property is a main home;
- When property is inherited; or
- If you are an executor or administrator of a deceased estate.
Old Rules – Main Home
Under the old rules properties will not be subject to the bright-line rules if they have been your main home for more than 50% of the time you have owned the property within the relevant bright-line period.
Inland Revenue has clarified that a main home is where you have lived most of the time. Therefore, you must actually had to have lived at the property for this exemption to apply.
For residential properties that were acquired between 29 March 2018 and 27 March 2021, a bright-line period of 5-years applies.
New Rules – Main Home
Properties acquired after 27 March 2021 will be subject to the extended bright-line period of 10 years, unless the main home exemption applies. However, the rules for the main home exemption have changed. Where the property is not used as your main for one or more periods of 366 days or more, while you own it, you will be required to pay tax on a proportion of the increase in the value of the property that matches the proportion of time that you owned the property and (for 366 or more consecutive days) were not living in the home as your main home.
Do the same Rules Apply to Newly Built Properties?
Newly built properties are still subject to the bright-line rules, however Government has excluded new builds from the most recent law changes. Therefore, new builds continue to be subject to the 5-year bright-line rules as discussed above. Government has provided some clarity regarding what constitutes a ‘new build’ by confirming that property which clearly increases residential housing will qualify as a new build.
Who can I Contact for Assistance with my Property Matters?
Our team at Parry Field have designed a helpful flow chart to assist you in determining whether your property will be subject to the bright-line rules. For further clarification, we suggest that you engage a tax specialist or one of the property lawyers at Parry Field Lawyers who would be more than happy to provide personalised advice.