What Is The Bright-Line Test For Residential Property?

23 March, 2021 | Bret Gower

Investors in residential property need to be aware of the “bright-line test for residential land”. This test first came into effect on 1 October 2015. Since that date gains on the proceeds of sale of residential property acquired and disposed of within a certain period are liable for income tax, subject to certain exclusions. Originally the time period was property sold within two years of purchase, that was extended to five years in March 2018.

In March 2021 the Government further extended the time period so that any property purchased on or after 27 March 2021 and then on-sold within ten years of purchase will be subject to the bright-line test.

Property acquired prior to that date can still fall inside the five year period so please discuss your plans with us before beginning the process.*

Residential land has a particular definition in the Income Tax Act 2007 but essentially it includes land zoned for residential purposes, whether or not it has a house erected on it – and can include Subdividing land. For example, if you bought a large property intending to use it all as your family home but within the five year bright-line period you changed your mind and decided to sub-divide a section off and sell it the proceeds may be liable to income tax depending on the timing of the subdivision and sale of the unwanted section of land.

The bright-line test will not apply if you are already liable for income tax on the sale of property due to your intention to dispose of the property when it was acquired, or because you are involved in a land-related business such as a property developer or as the owner of a business that buys and sells land or a building business.

Bright-line Exclusions

One of the purposes of the bright-line test is to “target people who seek to make a profit from property speculation”, and as such it excludes property used as your main home, inherited property and property sold subject to a relationship property agreement.

The “main home” exclusion does not apply when you have used the exclusion two or more times within the two years immediately prior to the bright-line date or if you have a regular pattern of buying and selling residential land. The 2021 extension of the bright-line test also proposes a ‘change of use’ rule that may affect your calculation of the main home exclusion if the property is not used for a consecutive period of 12 months or more.

The most recent extension of the bright-line test period, has an exclusion for new build properties. Properties purchased as a new build will only be subject to the bright-line test if they are sold within five years of being purchased. Guidance as to what constitutes a new build is expected in due course but at the date of the announcement the Government said it is intended to include properties that are acquired within a year of receiving their code compliance certificate under the Building Act 2004.

What should you do?

The main thing is for you to be aware of the potential ten year window that the bright-line test creates (five years if acquired prior to 27 March 2021) and if you have concerns that you may be liable for an income tax assessment on the profit from the sale of your property then talk to Smith and Partners to ensure you understand the timing of the bright-line date in your specific circumstances.

Are you looking to sell property that may be subject to the Brightline Test? Ensure you get the right advice before you sell. Contact tax law expert Bret Gower today to set up an appointment.

Phone: 09 837 6893
Email: bret.gower@smithpartners.co.nz

*The bright-line period begins from the date of registration of title for the property being purchased, and ends upon entering into a binding agreement to sell the property (when the agreement becomes unconditional).