Changes to the “bright-line test” for capital gains tax

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On 29 March 2018, a change to the “bright-line test” for tax on capital gains from residential property came into effect. The change extends the bright-line test from two to five years. It is intended to dampen property speculation and make New Zealand homes more affordable, by making it less appealing for speculators to make ‘quick bucks’ buying and selling homes.

What does this mean for buyers and sellers of residential property?

It means capital gains on residential property purchased from 29 March 2018 will be subject to taxation if sold within five years, rather than two years as previously.

Bright-line test exemptions

As with the previous bright-line test, there are some exemptions, such as the main home exclusion. However, property owners still need to be careful they meet the requirements for the main home exclusion to be exempt from tax when they sell their property within the five year bright-line period.

The property must be your main home most of the time

To qualify for the main home exclusion, the property must actually be used as your main home. Just intending to use the property as your main home doesn’t count. Nor does having a family member live there, but not the owner. It must actually be used as your main home for more than 50% of the time you’ve owned it.

The land must be used predominantly for your main home

If the land is used for more than one purpose, it must have been used predominantly as your main home. So if there’s a rental property on the land as well as your own home, the relative areas will need to be determined, to prove that most of the area of land has actually been used for the owner’s main home.

Live in two homes? You can’t choose which one is your ‘main home’

You can’t elect which of your two homes is your main home for the purposes of the bright-line test. In this case, your main home is the property you have the greatest connection with. To determine this, your time spent, possessions kept and family living in each property, as well as social and work ties in the area, might be considered.

Habitual sellers – beware the bright-line!

If you’re a ‘habitual seller’, you can’t use the main home exclusion, even if you meet the other requirements. So if you’ve already used the main home exclusion in the past, or you have a history of buying and selling for profit, be careful – you may still find yourself subject to taxation on the sale of your main home.

Selling property you’ve inherited from a deceased estate

If you inherit property in a will, and then sell it within five years, you won’t have to pay tax on capital gains made during the time you’ve owned it.

Selling property you’ve acquired in a relationship property settlement

If you acquire property as part of a relationship property settlement, and then sell it within five years, you will be subject to the bright-line test when you sell, and you may have to pay tax on capital gains. That is unless another exemption applies, such as when the property is your main home.

Minimising the tax you’re liable for

If you’re subject to the bright-line test, remember that all costs associated with the property can be used to offset the capital gains made. That includes the purchase and sale costs such as lawyers and valuers, and the cost of any improvements or renovations you’ve made to the property. So remember to keep your receipts!

While we’ve covered the basics here, there are many other aspects to the bright-line legislation that may apply to you, so it pays to speak with an experienced property lawyer before you buy or sell any residential property.

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