The bright-line test taxes profit made on the sale of residential property when it is sold within a certain period of time (bright-line period) and no exclusions or rollover relief apply.
The bright-line test also applies to New Zealand tax residents who buy and sell residential property overseas.
Your intention or purpose for purchasing or selling the property is not relevant.
When residential land that is subject to the bright-line test is disposed of for no consideration or for inadequate consideration, the amount deemed to be received is the market value at the time the property is transferred or sold.
Residential property
Residential property includes:
· land with a house on it
· land the owner has an arrangement to build a house on
· land the owner can build a house on under the district plan rules.
Residential property does not include farmland or land used predominantly as business premises, unless it is a business providing accommodation in a dwelling that is not the owner’s home.
Bright-line start and end dates
· For a standard purchase of property, the bright-line period starts from the date the property’s title is transferred to you, generally the settlement date.
· For a standard sale, the bright-line period ends when you enter into a binding sale and purchase agreement to sell the property.
· For gifts of residential property, the end date for the bright-line period is the date the person makes the gift of the residential property. Generally, it is the date the interest is registered to the new owner.
Main home exclusion
The bright-line test does not tax the sale of a property that has been your main home.
· Your main home is the property where you lived for most of the time.
· Having the intention to use the property as your main home is not enough, you must have actually used it for this purpose.
· The main home exclusion will also not apply when only a family member and not the owner have used the property as their main home.
· You cannot have more than 1 main home, and you can only use the main home exclusion twice in 2 years.
Main Home: Different Criteria for the date of acquisition
Different criteria apply to your main home depending if you acquired it before, or on or after 27 March 2021.
Before 27 March 2021 you must have:
· used more than 50% of the property’s area as your main home (including things like the yard, gardens, and garage)
· lived in the property as your main home for more than 50% of the bright-line period.
On or after 27 March 2021 you must have:
· used more than 50% of the property’s area as your main home (including things like the yard, gardens, and garage)
· lived in the property as your main home for 100% of the brightline period. This includes any period of up to 12 months where it was not used as your main home (for example, a period between moving out and when the property is finally sold).
Partial main home exclusion
If you acquired your property on or after 27 March 2021 and you do not meet the above criteria for the full exclusion, you are eligible for a reduction in the amount of tax you need to pay based on how much of and for how long the property was used as your main home.
Limits to claiming the main home exclusion
The main home exclusion does not apply when you:
· have a regular pattern of either buying and selling or building and selling your main home (even if you live in the property before it is sold)
· have already used the main home exclusion twice over the 2-year period immediately before you sold.
Rollover Relief
Rollover relief has always been available for property transferred:
· as deceased estate and inherited property
· under a relationship property agreement
· under a resident’s restricted amalgamation.
From 1 April 2022 until 30 June 2024, the following changes in legal ownership also qualify for full or partial rollover relief:
· transfers to or from look-through companies and partnerships
· certain transfers to or from qualifying family trusts
· transfers within tax consolidated groups of wholly-owned companies.
Rollover relief and main home exclusion
If rollover relief applies, any period of time a property is used as a main home by the original owner is also attributed to you and can be taken into account when you sell the property. This means the usage is attributed and there is no tax to pay at the time of the transfer if the main home exclusion applies
No rollover relief for transfers from parents to children
Rollover relief does not extend to parents helping their children own their first home. If parents are co-owners and later sell their share to their children, the bright-line test applies. Transfers of residential land for family trusts
There are special rollover relief rules for certain transfers of residential property to or from family trusts. These mean the bright-line property test looks at how long you (transferee) and the previous owner (transferor) held the property for.
Information Sharing: IRD and Land Information New Zealand (LINZ)
IRD have received data for nearly a decade from Land Information New Zealand (LINZ).
The requirement for people to provide IRD numbers on the LINZ Tax Statement has given Inland Revenue an improved view of all New Zealand property and how it is held, including properties held by Individuals, Trusts, Companies and Partnerships.
IRD use that data in various ways including reminding people about their bright-line obligations or identifying people who are trading in property or potentially getting rental income.
IRD have started audits on people they know previously filed income tax returns which included rental income. IRD are interested in why they may have stopped including rental income in their returns when they still own multiple properties.
IRD say using property data is also proving very useful in debt collection.
Inland Revenue are finding that letting people know that IRD are aware of their property holdings gets debts paid faster.