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What is the Bright-line Property Rule?

According to the IRD, if you sell a residential property you have owned for less than 10 years you may have to pay income tax on any gain on the sale, unless an exclusion or rollover relief applies. This is the Bright-line Property Rule (also known as the Bright-line Test), which also applies to New Zealand tax residents who buy overseas residential properties.

The criteria for the Bright-line Test period has been amended on a number of occasions, so the time when you purchased the property and the period that you have owned the property are both relevant factors.

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;
• Any property bought 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.

Exemptions:

There are a number of exemptions that may apply to make the profit on a property sold within the relevant period exempt from the payment of income tax under the Bright-line Test.

The transaction may qualify for an exemption in the following instances:

- When the residential property is the main home of the registered owner.

- When a residential property or a portion of it is a distribution from an estate.

- When a residential property is transferred during the course of the administration of an estate.

- Receiving or disposing of residential property under a separation agreement or contracting out agreement.

- Property transfers conducted during the process of a company amalgamation.

- When the property being sold is farmland.

- In certain circumstances when settling residential property on a family trust or transferring from a family trust.

In order to check whether the transfer of your property falls within any of the exemptions, we recommend that you seek legal advice.

The Acquisition Date:

When you acquire a property and how you acquire the property can have an effect on when the Bright-line Test period starts. This is known as the acquisition date and is date from which the Bright-line Test period begins. The acquisition date may not be what you expect, and may differ depending on the method of acquisition. For example, the acquisition date for buying a property off the plan differs from a standard property purchase.

The Disposal Date:

The Disposal date is equally as important, this is the date that determines whether you fall within or outside the Bright-line period when you sell your property. The disposal date will also differ depending on how the property is disposed of. For example, it the property is being sold subject to an agreement for sale and purchase, or whether it is transferred under a mortgagee sale or if it is gifted, differing disposal dates will apply.

There are further considerations that may apply to your residential property transaction – for example different rules apply to new builds and there may be some apportionment of tax liability for partial occupancy of the family home during the relevant test period.

We recommend you seek legal advice to determine both the acquisition date and the disposal date of your residential property, to establish if the transfer of the property may result in tax implications under the Bright-line Property Rule.

Please contact us if you would like assistance in establishing whether the Bright-line Test is relevant to your property transaction.