The bright-line tax rules were recently changed. Below are some key points you should know if you are considering selling your residential property.
- Brightline tax is only payable on the sale of 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).
- You must pay income tax on any capital gain you make on the sale of a residential property which:
- (a) You purchased between 1 October 2015 and 28 March 2018 and sold within two years of its purchase; or
- (b) You purchased on or after 29 March 2018 and sold on or before 26 March 2021 within 5 years of its purchase; or
- (c) You purchased on or after 27 March 2021 and sold within 10 years of its purchase.
unless you qualify for any of the exemptions listed below.
New builds: The government has indicated that “new builds” acquired after 27 March 2021 will continue to be subject to a 5 year bright-line rule. The law will be passed and will apply retrospectively once government has consulted on the definition of “new builds”.
- Exemptions
Generally, you will not have to pay tax under the bright line rule if:- (a) The property is your “main home”, unless you have sold your “main home” more than twice in the two year period prior to the date of sale of your current “main home”, in which case the exemption is not allowed. The definition of a main home also changed recently. The application of the main home exemption is now not an “all or nothing” exemption, but depends on how long the home has been used as a main home. Residential land owned by a trust can qualify for the main home exemption in limited circumstances; or
- (b) You inherited the property; or
- (c) The property is being transferred as part of a relationship property settlement. However, unless the property is your main home, bright line tax will be payable if you subsequently sell the property within the applicable bright line period from the date the property was originally purchased by you and your spouse or partner; or
- (d) You are transferring the property as an Executor of an Estate.
- Existing tax rules apply: The bright line rule adds to (and does not replace) existing tax rules. For example, under existing rules you may be liable to pay tax on any capital gains made on any property you buy with the intention of selling, no matter how many years later you sell it.
- Professional advice recommended
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. You should take advice from your accountant or tax advisor to determine whether the sale of your land will attract the bright line tax. Please contact us if you have any queries about your individual situation.
