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.

In July 2024, the National-led coalition government reversed changes made by the Labour party to extend the bright-line test to five and then ten years. All properties, regardless of when they were bought, will now have a two year timeframe.

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What does the test look at?

  • 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 two years of your start date.
  • For property sold before 1 July 2024, different timeframes applied.

The purchase date for a property is taken from the date of registration on 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 28 March 2018
  • Properties purchased as family homes / your primary residence
  • Units or homes used for retirement purposes
  • Properties that have been inherited (unless you are buying someone else’s share of an inherited property)
  • 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

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.

When does the bright-line test start for different types of purchases and acquisition?

  • Standard property purchase: Land Information New Zealand registration transfer date.
  • Subdivided land: Original date of registration.
  • Any acquired property that relies on the completion of a subdivision or land development: Date of entry for sale and purchase agreement.
  • Change of trustee: Start date of the original trustee.
  • Joint tenancy that has been converted to a tenancy in common or vice versa: Brightline start date prior to the tenancy being converted.
  • Purchase with no registration prior to sale: Date you acquired an interest.
  • Freehold estate converted from a lease with perpetual renewal rights: When you were first granted the leasehold estate.
  • Land outside of New Zealand: Date of transfer under foreign laws.

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.