Bright line tax - law change makes property speculation less attractive

3 May 2018

It’s becoming increasingly difficult to make money by buying and selling residential property. Many would say that’s a good thing.

In 2015 the National government introduced a “bright line” tax. The tax was introduced to reduce speculation on the housing market and make homes more affordable. This law made gains from the sale of residential property sold within two years of purchase taxable (with some exceptions).

On 29 March 2018 the Labour government extended the period to five years. Tax is now payable on the gains made if a residential property bought after 29 March 2018 is sold within five years of its purchase. For residential land bought after 1 October 2015 and sold within two years the two year bright line period still applies.

The “bright line” test

By making the tax payable when a property is sold within a clearly defined period there is little room for argument – the sale is either taking place within the period or it is not. Therefore the tax is either payable or it is not. This is a “bright line test”.

The dates when the bright line period starts and finishes depend on the type of transaction. For a standard sale and purchase it starts when the person is registered as the owner and ends when the person signs an agreement to sell the land.

Existing tax rules still apply

Under the existing tax rules the gains on land purchased with the “intention” of selling it are taxable. It can be very hard to prove what someone’s intention was when the land was purchased. The introduction of the bright line test means that it is not necessary to show the land was purchased with the “intention” of selling it. The tax is payable if the sale is within the defined period, whatever the person’s intention was when he or she bought it. Even if residential land is sold outside the bright line period, the gains might still be taxable under existing rules.

Bright line tax is only payable on “residential land”

The bright-line test only applies to “residential land”. Residential land includes land that has a dwelling on it, land where the owner has an arrangement to build a dwelling on it, and bare land that could have a dwelling erected on it under the relevant district plan. "Residential land" does not include land predominantly used as business premises or farm land (which is land being worked on, or capable of being worked, as a farming or agricultural business).

The “main home” and other exemptions

A person’s main home is exempt from the tax if it is sold within the bright line period, unless the person has used the main home exemption more than twice in any two year period prior to the date of sale. A person can only have one main home. Bright line tax is also not payable on the transfers of inherited land or land transferred as part of a relationship property settlement. Residential land owned by a trust can qualify for the “main home exemption”, but only if the property is the main home of a beneficiary and the person who has settled the most by value on the trust does not own a main home. The main home exemption will not apply if another property is owned by the trust in which another beneficiary resides.

The devil’s in the detail

As with many tax laws, there is a raft of definitions to be considered and the application of the law in certain situations may not be clear. In many cases residential land owners will need to take advice from their accountant or tax advisor to determine whether or not a particular sale will attract the bright line tax.


Please email me at [email protected] with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.

Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.


Barbara McDermott