Bright-Line Test - Residential Sales & Purchases
On the 1st of October 2015 the IRD introduced a ‘Bright-Line test’ for the sale of residential property. Basically, if you bought and sold a property that was not your main home within two years, you would be required to pay tax on the capital gain. On the 29th of March 2018, the ‘Bright-Line test’ was extended to five years.
The Bright-Line rules apply if the first interest in land was on or after 1 October 2015. First interest in land is the date a signed Sale and Purchase Agreement was in place, not settlement date. So, if a sale and purchase agreement was signed on the 20th of March 2018 but settled on the 5th of April 2018, the two-year test will apply, not the five-year test.
If you nominate another personal or entity to purchase a property, the nomination date becomes the first acquisition date as opposed to the date of the Sale & Purchase Agreement. So, when purchasing a property, it is best to make that decision quickly so in order to get the acquisition date as early as possible.
The Bright-Line rules apply to residential land including bare residential land but it specifically excludes business premises and farmland. If the property is used for both business and residential, you need to look at the proportion, so if the property is more than 50% residential, the Bright-Line rules will apply. The Bright-Line rules apply to overseas residential accommodation, so if you sell an investment property in Australia and have paid capital gains tax there, you can apply this tax credit against any tax relating to the Bright-Line rules in New Zealand.
The disposal date for Bright-Line test purposes is generally the date on the Sale and Purchase Agreement.
Main home exclusion - if the property was your main home for at least half the time you owned it, your property will be exempt from the rule. This exemption will not apply if you have a history of buying and selling properties though. You can only use the main-home exemption twice in the preceding two years and this has not changed with the Bright-Line test extending to five years.
Relationship property transfers – when residential property is transferred on settlement of relationship property, disposal and acquisition is deemed to be at cost rather than market value and the acquisition date for the transferee is deemed to be the date the transferor originally acquired the land.
Inherited property- Bright-Line rules does not apply where property has been transferred from the deceased to estate, estate to beneficiary and subsequent disposal by beneficiary.This information is intended to be general in nature and we highly recommend receiving tax advice prior to entering into any property transactions, particularly residential land not subject to the main home exemption (e.g. investment/rental properties or holiday homes).