The Bright-line Test and What it Means for Home Buyers

The Bright-line test determines if tax is payable on profits made from the sale of residential property in New Zealand. It is also known as New Zealand's version of a capital gains tax.

 

According to the Income Tax Act 2007, purchasing property in New Zealand with the intent to sell makes you liable for tax on any profit made from its sale – this is also known as the intention test. In 2015, the National government introduced the Bright-line test to complement the intention test. If you sold a property within two years of acquisition, you would need to pay tax on the capital gain. 

In 2018, the Labour Party extended the Bright-line period to 5 years, and in 2021, it was further extended to 10 years, with some exceptions. With a recent change in government, significant updates to the Bright-line test have been announced and will take effect on the 1st of July, 2024.

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Key Changes to the Bright-line Test

  • From the 1st of July 2024, The Bright-line test period will be reduced to two years.
  • Only properties sold within two years of purchase will be subject to tax on any profit made, unless an exception applies.
  • From the 1st of July 2024, The Bright-line test period will be reduced to two years.
  • Only properties sold within two years of purchase will be subject to tax on any profit made, unless an exception applies.

Exceptions Remain

The following general exceptions will continue to apply under the new Bright-line test rules. However, please note it pays to take legal and tax advice to make sure you are aware of all your obligations relating to Bright-line.

  • Selling your main home (conditions apply – this must be the property where you live for most of the time).
  • Property transfers due to separation or relationship property settlements.
  • Certain property transfers to Trusts.
  • Properties received through an Estate transfer.

The Impacts of the Bright-line Test

  • From the 1st of July 2024, the new two-year Bright-line test will apply to all properties.
  • Properties purchased before July 2022 will no longer be subject to the Bright-line test as of July 2024, as they will have been owned for at least two years by that time.
  • OneRoof reported the changes could impact about 60,000 properties, with each one saving between $55,000 and $65,000 in tax.
  • This update could potentially encourage increased activity in the property market, prompting earlier investor purchases and it could also drive potential selling. However, the full impact this change will have on property prices will require further analysis over time.

At Rapson Loans & Finance, we are committed to keeping you informed about important legislative changes that can impact your financial decisions. If you have any questions or need assistance navigating these changes, please don’t hesitate to contact us.

Please refer to the IRD website for more detailed information about your potential tax obligations under the Bright-line property rule.