The bright-line property tax rule – Do I need to pay tax on the sale of my property?
The Bright-line Test, or “Bright-line Rule” applies to the sale of all residential property in New Zealand. In short, if you sell a residential property within the prescribed periods, you will be required to pay tax on the net profit of the sale, calculated at your own personal tax rate. The bright-line rules are strict with limited exceptions. If the bright-line rule applies to the sale of your property, you will need to show the income from the sale in your income tax return. Every seller’s tax number is captured by their lawyer when the property is transferred to the new owner, so there is no hiding from the bright-line rule!
How do I know whether I need to pay tax on the sale?
Whether you pay tax on the sale of your residential property depends on when the property was purchased and how long you have owned it for. The bright-line rule has evolved over time since it was first introduced by the government. The bright-line rule does not apply to any property purchased before 1 October 2015, however, it will apply to all residential properties acquired:
on or after 27 March 2021; and
o sold within 5 years for qualifying new builds, or
o within 10 years for all other properties;
between 29 March 2018 and 26 March 2021 and sold within 5 years; and
between 1 October 2015 and 28 March 2018 and sold within 2 years.
Further changes coming?
On 20 December 2023 the Finance Minister of our current coalition government announced that the government intends to bring the bright-line rule for residential property back to 2 years, effective from 1 July 2024. If this is brought into law, then any property purchased after 1 July 2024 will be subject to this rule. It is important to note however that this has not yet been implemented into our law, and any property you currently own will be subject to the applicable rule discussed above.
Exceptions to the bright-line rule
There are some exceptions to the bright-line rule:
The sale of business premises
The sale of farmland
Selling your main home
A property you acquire as part of a relationship property agreement
A property you inherit under a deceased estate
Business premises and farmland are excluded from the bright-line rule because they are not “residential” property. However, you should always get advice before selling your property. Careful analysis is required for “mixed-use” premises such as your family home on the farm, or other types of business premises where you may live on the property and also conduct your business from there.
Generally, the bright-line property rule does not apply to the sale of property that has been your main home. However, it is important to note the main home exception is not clear cut. You need to be certain your property meets the criteria to be considered as your “main home” in order for it to be excluded. Different rules also apply depending on whether you acquired your home before, or on or after 27 March 2021. There are also special rules for a main home held by a family trust. Again, it is important to take advice before making any assumptions and it’s recommended you seek advice before listing your property for sale.
Other types of property transfers
Full or partial relief can apply to other types of ownership transfers depending on the circumstances. For example, the bright-line property rule does not apply if you’re the executor or administrator of a deceased estate or if you inherited the property. However, the bright-line rule could still apply if you subsequently sell the property after acquiring it via inheritance.
There may also be exceptions if you acquire the property as part of a relationship property agreement, for certain transfers to or from look-through companies or partnerships, or qualifying family trusts. Again, any subsequent transfers can still be captured under the bright-line rule so you need to be careful before entering into a contract for sale.
Other tax rules may still apply to the sale of your property
It is important to note that even if the bright-line rule does not apply, there may be separate income and property tax rules that apply to the sale of your residential property. This includes circumstances such as:
you bought the property with the intention to sell it
you have a pattern of buying and selling, or building and selling, your main home
you are a person associated with, or are in the business of property dealing, developing or building and the property was bought for the business.
Residential Land Withholding Tax (RLWT)
You may be required to pay RLWT if you're an offshore RLWT person for tax purposes and sell a residential property that is subject to the bright-line property rule. This includes individuals, but also applies to companies (where more than 25% of the directors, and/or 25% of the shareholders are offshore RLWT persons). It also applies to trusts and estates where certain trustees or beneficiaries are RLWT persons.
The tax legislation requires that the residential land withholding tax (RLWT) is deducted at the time of sale by your lawyer which means it is immediately deducted from the sale proceeds at settlement.
Get the right advice!
As you can see, the bright-line rules are complex and very much depend on your individual circumstances. They are also subject to change depending on new legislation that may be introduced by the government*. It is important that you get the right advice before listing your property for sale. Our team are experienced in all aspects of property law, including the bright‑line rules, so can help you navigate the rules and avoid any surprises such as an unexpected tax bill.
This material is general in nature and has been provided for informational purposes only. It is not intended to be relied upon as advice. *The rules discussed in this article are current at the date of publishing (5 February 2024) and may be subject to further changes not yet enacted.
