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Changes to the Bright-line Test – am I affected?

Published in July 2024

You will likely have heard about the reinstatement of the two-year Bright-line Property Rule (also known as the Bright-line Test) which came into effect on the 1st of July 2024. The change to the rule, which has been introduced as part of National’s ‘Back Pocket Boost’ tax policy, will be an important consideration for homeowners and investors considering selling properties in the current market.

 The Bright-line Property Rule (or Bright-line Test) is New Zealand’s intention-based tax system for property; the closest thing we have to a capital gains tax. The test determines whether you pay income tax on the capital gain received from the sale of residential property. It’s designed to tax investors and is based on the time you purchase the property and the period for which you own that property before selling it.

According to the IRD, if you sell a residential property any profit will be taxable if it is sold within a set period of time, the Bright-line period, unless an exclusion or rollover relief applies. This also applies to New Zealand tax residents who buy and sell overseas residential properties.

Naturally there are exemptions and exceptions to the rule; primarily if the property is your main home, if it is relationship property or inherited property (see our previous article here for more about exemptions and exceptions). There is also an exemption regarding certain property subject to the January and February 2023 floods.

The rule has changed multiple times since its introduction in 2015. The previous rules stated that if the property was acquired:

  • Between 1 October 2015 and 28 March 2018: If you sell within two years you will have to pay income tax on any capital gain (all properties bought in this period have passed this 2-year threshold);
  • Between 29 March 2018 and 26 March 2021: If you sell within five years you will have to pay income tax on any capital gain;
  • From 27 March 2021 onwards: If you sell within 10 years will be liable to pay income tax on any capital gain, or if you sell within 5 years for a qualifying new build.

However, the recent change means that any property sold after 1 July 2024 may now only be liable for income tax if it was sold within a 2-year threshold.  In other words, the buyer has a two-year “Bright-line end date”.  So, for property sold on or after 1 July 2024, the Bright-line Test looks at whether your Bright-line end date for the property is within 2 years of your Bright-line start date.

The shortening of the Bright-line Period will no doubt affect property investment in New Zealand as investors benefit from greater flexibility. It will be interesting to see whether this change will also increase supply to the property market as prospective buyers and sellers will no longer be ‘locked in’ to ten-year periods.

This rule change may affect your current or future plans for property investment, and we recommend that you seek legal advice on whether this rule change applies to your portfolio. 

Please contact us if you would like assistance in assessing your options.

 



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