Bright-line test

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Taxing financial gains

The bright-line test seeks to help more kiwis into homes and determines how to tax the financial gains achieved when property owners buy and sell their properties for income.

Prior to 2021, the bright-line test only came into play if someone was planning on selling an investment property within a period of five years since it was first purchased. In an attempt to even the playing field for first-time homeowners, the government decided to extend this to ten years unless the property is a new build, in which case the 5 year period will apply.

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What does the test look at?

  • If your property is purchased on or after 27 March 2021 and you sell the property within 10 years, or within 5 years for new builds
  • Properties purchased from 29 March 2018 to 26 March 2021 that are sold within 5 years
  • Properties purchased from 1 October 2015 to 28 March 2018 that are sold within 2 years

The purchase date for a property is taken from the date of registration in LandOnline. Your sale date is the date an agreement is entered - once you sign an agreement to sell, the test will apply to you.

Exceptions to the bright-line test include:

  • Properties acquired before 1 October 2015
  • Properties purchased as family homes / your primary residence
  • Retirement units
  • Inherited properties
  • Residential properties that are being used for farmland or business purposes

While your primary residence is excluded from the bright-line test, there are a number of factors your property must meet to qualify as a primary residence:

  • If you own more the one property, the amount of time spent living in each household
  • Where your immediate family members are currently residing
  • Which property your personal belongings are located in
  • Which property you have the strongest social ties too
  • The use of your property
  • Your societal ties with the local community, such as business and employment

Please note, your property cannot be defined as your primary residence based solely on your intention to use it as such.

How does the bright-line test work?

Rachel decides to purchase a new investment property to add to her portfolio. It is not a new build. For the first eight years, she rents the property out before deciding to sell. Given this is within the 10 year bright-line timeframe and does not meet any of the exceptions, Rachel will need to pay income tax on any profits made from the property’s sale.

A couple purchase a home for their expanding family. After living in the house for five years, they decide to move onto a bigger property that will better accommodate their family needs. As their original purchase was intended for family use and has also been used as such, they do not have to pay income tax on the profitis they make from the sale.

William and Sam decide to purchase a home for their eldest daughter to reside in whilst she is studying at university. When she graduates and moves city, they continue to rent the property out to students. After fifteen years of owning the property, they decide to put the house up for sale. This falls outside the 10 year bright-line timeframe and therefore William and Sam do not need to pay income tax on the profits they make from the sale.

Qualifiers for new builds

To qualify for the 5 year bright-line test period that applies to new builds, the following criteria must be meet:

  • For new builds currently under your ownership, the property must have been acquired no later than 12 months following the property’s code of compliance certification.
  • If you purchase a property that is a new build on a portion of land, the code of compliance certificate that confirms the property was added to the land needs to be issued before you go on to sell the land and transfer the title.
  • If you decide to build a new property on any land that you own, the code of compliance certificate needs to be issued before the sale date and title transfer.
  • A new build needs to be self-contained with its own bathroom and cooking facilities and have a primary enterance. You must have a code of compliance certificate that was issued on or after 27 March 2020 to confirm this.
  • The building needs to be located on the same land it was on when purchased at the time of being sold. If the property is relocated, the 10-year bright-line timeframe will apply.

What is the tax rate charged when selling?

The highest marginal tax rate for annual income is applied to your profits when you sell a house that meets the bright-line test regulations.

Converted or remediated buildings can qualify as new builds if they meet the following criteria:

  • The building was removed from the register for earthquake prone buildings on or after 27 March 2020. Proof will need to be provided in the form of a code of compliance certificate or building consent authority records that can show the work was finalised and approved by a qualified engineer.
  • If the building previously had issues with weathertightness, it needs to currently have a minimum of 75% reclad and a code of compliance certificate issued on or after 27 March 2020 as proof of this.
  • The building has been converted from a commercial property and has a code of compliance certificate dated on or after 27 March 2020 as proof of this.
  • The building was converted from a motel or hotel and you have records proving its completion took place on or after 27 March 2020.
  • The dwelling is part of a compex that was formerly a single dwelling and now contains 2 or more dwellings after converting the complex. A code of compliance certificate also needs to have been issued on or after 27 March 2020 to confirm the conversion.

Please note, if there is an older building and a new build that share the same legal title, the portion of land that contains the new build qualifies for the 5-year period, while the land containing the older building is subject to the 10-year timeframe. Any gain you make on the sale of the new build needs to be apportioned between the two. This is done using a land area test. If you meet the criteria for offshore Residential Land Witholding Tax, other rules may apply.

If you have any concerns or questions about the bright-line test, please touch base with your Hammond & Co property manager.