Our team here at Aspiring Law is fielding a lot of queries about the latest changes to what’s known as the “bright-line test”, the property tax regime that came in in 2015.
When the law was initially introduced, residential properties, with a handful of exceptions, bought and sold within a two-year time frame attracted income tax on the profit. The latest changes, however, extend the bright-line test from the original two to five years.
Under changes to the Income Tax Act, the new five-year bright-line test applies to certain residential property purchased after March 29 this year. So, buyers of such properties bought after that date who then sell within five years will face a tax bill – and that’s regardless of the intention at the time of purchase.
Generally, the five-year period starts on the date the property transfer is registered with Land Information New Zealand (LINZ).
Different dates apply if you:
- Sell the property before your purchase is registered with LINZ (for example, a sale or purchase "off the plan")
- Subdivide a section
There are three exclusions to the bright-line test:
- It's your family/main home
- You inherited the property
- You're the executor or administrator of a deceased estate
If you receive a property as part of a relationship settlement agreement and go on to sell this property within five years of its original purchase date, the bright-line test will apply. You might be entitled to an exemption, though, if it’s your main home.
For more of the nitty gritty on the bright-line test, you can check out IRD’s Q + A.
