Directors Opinion: Glen White
The bright-line test rules introduced in 2015 resulted in some residential property owners having to pay tax on gains from property sales. Since 2015, there have been several changes to the rules, including extending the bright-line period to five years and then ten years, changes to the main home exclusion, adding rollover relief for some property transfers, and having different rules for new builds.
The rules have, therefore, become overly complex with different rules applying to properties depending on when the property was purchased, who the property was transferred from, and the length of time used as the main home to name a few.
There are exclusions to the bright-line test rules and if one of the following exclusions applies there will not be bright-line tax payable when selling your property:
- The property is your main home and you meet certain use criteria
- You inherited the property
- The property was transferred after the owner’s death
- Relationship property transfers or
- Certain types of ownership transfers
The Inland Revenue has been collecting additional information from residential property sales. This has resulted in an increase in the number of risk reviews undertaken by the Inland Revenue to ensure the bright-line property tax provisions have been applied correctly in tax returns. These risk reviews require providing the IRD with a significant amount of information including sale and purchase agreements, settlement statements, explanation of reasons for selling, details of all properties held, and a timeline of properties resided in.
It is also important to note that the bright-line test is only one of many taxing provisions on property sales. The other provisions include buying a property with the main intention of resale if you or an associated person is in
the business of property development or if you have a regular pattern of buying and selling property.
It is extremely important to have a general understanding of the bright-line test rules. However, our recommendation is that you should always seek professional advice before considering selling residential property, including residential land so that your situation can be reviewed. You will then be fully aware of the consequences of the bright-line test rules and alternatives can be considered to mitigate your tax liability.
