The bright-line rule determines if your property gains are taxable.
It only applies to residential property sold within 10 years of purchase, or within 5 years for a new-build.
There are exceptions to the rule, such as if the property is your main home, the property is farmland, the property was inherited, or the property is used as a business premises.
However, rules may differ for properties purchased before 27 March 2021.
If a property is sold within the bright-line period, an IR833 form should be submitted with your tax return, and tax will be payable on the gain at the seller's individual income tax rate.
Generally there are no taxes to pay on property gains if sold outside the bright-line period, however exceptions for this exist also, which are explained below.
The bright-line test is a tax law in New Zealand that determines whether you need to pay tax on the gain on sale of a property.
As of today, the bright-line rule states that if you sell a residential property within ten years of purchasing it, you will need to pay tax on the gain.
There are some exceptions to this rule which we will discuss below.
The Bright-Line Rule Depends On Date Of Purchase
The bright-line rule has changed over the years.
As a result, which version of the bright-line rule applies to you will depend on when you acquired your property.
Your gain on sale will be taxable under the bright-line rule if you purchased your property:
- on or after 27 March 2021 and sold within 5 years for qualifying new builds or within 10 years for all other properties.
- between 29 March 2018 and 26 March 2021 and sold within 5 years.
- between 1 October 2015 and 28 March 2018 and sold within 2 years.
What Date Is A Property Considered "Bought" And "Sold"?
A property is considered "bought" when there is a binding sale and purchase agreement between the vendor and purchaser.
For example, you make an offer to buy a property on 1st May.
The seller accepts the offer on 10th May by way of signing the sale and purchase agreement.
The settlement completes on 31st May.
In the eyes of the IRD you will have purchased the property on 1st May, because that is when the sale agreement occurred.
The same logic is used when selling your property.
A property is considered sold when you enter into a binding sale and purchase agreement to sell the property.
Note: A property acquired on or after 27 March 2021 will be treated as having been acquired before 27 March 2021, if it was acquired as a result of an offer the purchaser made on or before 23 March 2021 and that offer could not be revoked or withdrawn before 27 March 2021 (for example by tender). In this case the 5-year bright-line period applies.
If You Sell A Property Outside The Bright-Line Period
The bright-line property rule does not apply if you sell a property outside the applicable bright-line period.
However, this does not necessarily mean you don't need to pay tax on the gain.
There may be other tax rules that make your gain taxable, such as:
- You bought the property with the intention of selling it for a gain.
- You have a pattern of buying and selling or building and selling your main home.
- You or a person you’re associated with is in the business of property dealing, developing or building and the property was bought for the business.
Exceptions To The Bright-Line Rule
Generally, the bright-line property rule does not apply if the property:
- Is your main home
- Is used predominately for business
- Is being used as farmland or capable of being used as farmland.
- It's a home you inherited.
Main home exception
- Your main home is the property where you live most of the time.
- For a property to be considered your main home, you must have used more than 50% of the property's area as your main home (including the yard, gardens, and garage).
- If you have more than one "home", your main home is the one you have the greatest connection to. This will depend on things like:
- the amount of time you spend living in each house
- where your immediate family lives
- where your personal property is kept
- where your social ties are strongest
- your use of the home
- what other ties (for example: employment, business, economic) you have with the surrounding community.
- You cannot have more than one main home.
- Your intention for the home is irrelevant. What matters is where you actually spend most of your time living.
- If you purchased the property before March 27 2021, the property will only qualify as your main home if it has been your main home for more than 50% of the time you've owned it.
- If you purchased the property after March 27 2021, the property will only qualify as your main home if it has been your main home for 100% of the time you've owned it.
You will not be eligible for the main home exception if:
- You have a regular pattern of either buying and selling or building and selling your main home (even if you or your family live in the property before it is sold)
- You have used the main home exclusion twice or more over the 2-year period immediately before you sold your main home.
Business Use Exception
The bright-line property rule does not apply to residential property that is used predominantly as a business premises.
The exclusion applies if the property is being used for business by the owner, or if it's rented out by the owner to other persons to use as a business premises.
However, for properties acquired after 27 March 2021, the "business" in question cannot be the business of supplying accommodation.
What If The Property Is Held In A Trust?
A residential property held in a trust can still use the main home exclusion if the property was the main home of a trust beneficiary.
However, one of the following must also apply:
- the principal settlor does not have a main home.
- the property is also the main home of the principal settlor.
If a principal settlor of a trust has a separate main home, the main home exclusion cannot apply to any property owned by the trust.
What If I Co-Own The Property?
If you co-own a residential property, the bright-line property rule will only apply to you if you have not used the property as your main home.
For example, if you live in one city, you may have a different main home from your co-owner living in another city.
The partner who co-owns the property and has not used it as their main home is required to pay income tax on their portion of any profit made when the property is sold, if sold within the bright-line period.
What Is The Tax Rate For The Bright-Line Rule?
You will pay tax on any gains under the Bright-Line Rule at your personal income tax rate.
For example, if you're currently in the 33% tax bracket, you will pay tax on your property gains at 33%.
How To Declare A Bright-Line Property Sale
If you have sold a property that that falls under the Bright-Line rule, you will need to complete an IR833 form.
This form will require the details of the sale and will work out your taxable gain on the sale of the property.
You can complete an IR833 form inside your myIR account.