What is the Brightline Test and what you should know about it
The bright-line test is a tax rule in New Zealand that determines whether you need to pay income tax on profits made from selling residential property. Here are the key things you should know about it:
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Purpose:List Item 1
The bright-line test was introduced to tax profits from property speculation and to help curb rapid buying and selling of residential properties
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How it works:List Item 2
If you sell a residential property within a specific timeframe after purchasing it, you may have to pay income tax on the profits from the sale
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Timeframes:List Item 3
The applicable timeframe depends on when you purchased the property:
- For properties bought between October 1, 2015, and March 28, 2018: 2-year bright-line test
- For properties bought between March 29, 2018, and March 26, 2021: 5-year bright-line test
- For properties bought on or after March 27, 2021: 10-year bright-line test
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Exceptions:List Item 4
The bright-line test does not apply to:
- Your main home (with some limitations)
- Inherited properties
- Properties used for business purposes
- Farmland
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Tax calculation:
The profit is added to your other income for the year and taxed at your marginal tax rate. You can deduct expenses related to the property purchase and sale
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Start and end dates:
The bright-line period typically starts from the date of registration of transfer of title (usually the settlement date) and ends on the date you enter into an agreement to sell the property
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Main home exemption:
You can use the main home exemption to avoid the bright-line test, but this can only be used twice in any two-year period
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New builds:
There's a reduced 5-year bright-line test for new builds to encourage investment in increasing housing supply
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Upcoming changes:
The National-led government has confirmed plans to reduce the bright-line test back to two years from July 1, 2024, regardless of when the property was purchased
- Universal application: The two-year bright-line period will apply to all residential properties, regardless of when they were purchased.
- Effective date: The new rules will come into effect on July 1, 2024. Properties sold after this date will only be subject to the bright-line rules if they are sold within two years of purchase.
- Impact on existing properties: Properties currently under the 5-year or 10-year bright-line periods will have their periods reduced to two years.
- Sale date matters: The date you sell the property is crucial. If you sell before July 1, 2024, the current bright-line periods still apply. However, if you sell on or after July 1, 2024, only the new two-year rule will apply.
- Exceptions remain: Existing exceptions, such as those for main homes, inherited properties, and certain transfers, will continue to apply.
- New builds: The current 5-year bright-line test for new builds will also be reduced to two years.
- Retroactive effect: Properties purchased before July 2022 will no longer be subject to the bright-line test as of July 2024, since all sales of those properties will have occurred after at least two years.
- Pending details: Some aspects of the changes are yet to be confirmed, such as the treatment of property transfers in and out of trusts, and potential adjustments to the 'main home' exemption.
These changes are expected to be welcomed by property investors and landlords, as they significantly reduce the period during which residential property sales may be subject to income tax.
It's crucial to consult with an accountant or tax professional before selling a property, especially if you think the bright-line test might apply to your situation.
Remember, the bright-line test is just one aspect of New Zealand's property tax system. Other rules may still apply even if you're outside the bright-line period, so it's essential to seek professional advice for your specific circumstances.
Citations:
[1] https://www.opespartners.co.nz/tax/bright-line
[2] https://www.bdo.nz/en-nz/services/tax/the-bright-line-test
[3] https://www.moneyhub.co.nz/bright-line-test.html
[4] https://www.accountech.co.nz/blog/understanding-new-zealands-brightline-test-what-you-need-to-know
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