Questions and answers: Bright-line rule
Supporting information on the bright-line property rule
WHAT'S ON THIS PAGE (FROM IRD’S WEB SITE)
General questions
Exclusions to the bright-line rule
GENERAL QUESTIONS
1. What does "bright-line rule" mean?
A bright-line rule is a clearly defined rule that leaves no room for interpretation.
You can think of it as someone drawing a line in the sand. It’s clear when you cross that line.
The bright-line property rule was updated on 27 March 2021. It says you’ll pay tax when you buy and sell a residential property within ten years unless an exclusion applies. It’s easy to know if this rule applies in your situation.
All existing property tax rules still apply. So even if the bright-line rule does not apply in your situation, that does not necessarily mean you will not need to pay tax on your property profits.
2. When does the bright-line rule apply from?
The bright-line rule applies to the sale of any residential property you’ve bought on or after 1 October 2015 as follows:
if you bought a residential property 1 October 2015 to 28 March 2018, inclusive: the two- year bright-line rule applies.
if you bought a residential property on or after 29 March 2018: the five-year bright-line rule applies.
if you bought a residential property on or after 27 March 2021: the ten-year bright-line rule applies
But whenever you buy a property intending to resell it, you’ll need to pay tax on any profit you make when you sell that property.
3. When does the bright-line period start?
Generally, the bright-line period starts on the date the property title is officially transferred to you, which is the date the property transfer is registered with Land Information New Zealand (LINZ).
If the property is in another country, the bright-line period starts on the date the transfer was registered under that country’s laws.
Different dates apply if you sell the land before your purchase was registered with LINZ or if you bought the land because of a subdivision of property (for example as a sale “off the plan”).
4. What types of property does this rule apply to?
The bright-line rule only applies to residential property.
A property is not residential if it’s mainly used for business or as farmland.
That means when you sell farmland or business property, the bright-line rule will not apply. But you’ll still need to follow existing tax rules. Talk with your tax advisor if you need more information about this.
5. What if I sell my property after the relevant bright-line period has ended for me? Do I have to pay tax?
If you sell a property outside of the relevant bright-line period for you, the bright-line rule will not apply to your property sale. But the intention test may still apply.
The intention test says you must pay tax on property profits if you originally bought a property with the intention to resell it. The intention test is not a new rule. It’s been around for a long time.
6. What happens if I make a loss on a property sale, instead of a profit?
If a residential property that the bright-line rule applies to was sold at a loss (and no exclusions apply), these losses would be “ring-fenced”.
If you owe income tax on another residential property sale in the future, you can subtract these “ring-fenced” property losses from the income you earned on this later sale. That means you’ll pay less tax on the later sale.
EXCLUSIONS TO THE BRIGHT-LINE RULE (AKA WHEN THE BRIGHT-LINE RULE WILL NOT APPLY TO MY PROPERTY SALE)
1. What does “main home” mean under the bright-line rule?
Your main home is the property where you live for most of the time or if you have more than 1 property it is the one you have the greatest connection to.
In any case, more than 50% of the property’s area must be used as your main home. If part of your main home was used for other purposes and that uses more than 50% of the property's area the main home exclusion will not apply and you will pay tax on any profit when you sell it. For example, if you use 40% of a property as your main home and rent out 60% as a granny flat, you cannot use the main home exclusion if you sell that property.
The main home exclusion may also apply if you’re a:
trustee of a trust and one of the trust's beneficiaries lives in the property and other conditions are met
property dealer, developer or builder or an associated person.
It's important to note that having the intention to use the property as your main home is not enough, you must have actually used it for this purpose.
The main home exclusion does not apply when you:
have a regular pattern of either buying and selling or building and selling your main home
have used the main home exclusion twice or more over the 2-year period immediately before you sold your main home
did not use it as your main home for the time required during the bright-line period. The amount of time it is required to be used depends on when you acquired it (in most cases the date you acquire it is when the sale and purchase agreement to buy it became binding).
The bright-line period starts on the date you bought the property which is generally the date the property's title is registered with Land Information New Zealand (LINZ) (generally the settlement date) and generally ends when you enter into a binding sale and purchase agreement to sell the property.
2. What’s the main home exclusion to the bright-line rule?
If you buy and sell your main home, the bright-line rule will not apply. It’s an exclusion to the bright-line rule. It means that you generally will not have to pay tax when you sell your main home.
But you can only use the main home exclusion twice over any two-year period. You’d have to pay tax on any profit you make from the sale of a third property in two years because you would not be eligible for the main home exclusion.
You’re also not eligible for the main home exclusion if you show a regular pattern of buying and selling residential property.
3. Who decides if the main home exclusion applies to me?
The person selling a property decides if it’s their main home. You’ll do that based on the criteria listed above.
If you need help figuring out if an exclusion to the bright-line rule applies to you, talk to your tax advisor.
4. Can I have more than one main home?
No, you can only have one main home.
If you live in more than one house, your main home is the one that you have the greatest connection to. You’ll find the criteria for deciding which property is your main home listed above.
5. My main home is held in trust. Am I eligible for the main home exclusion if I sell it?
Residential properties held in trust can use the main home exclusion under the bright-line rule if:
the house sold was the main home of the principal settlor of the trust, or the principal settlor did not have a main home, and
it was the main home of a beneficiary of the trust.
The principal settlor of a trust means the settlor whose settlements to the trust have been greatest by market value. In other words, the principal settlor is the person who has made the biggest financial contribution to the trust.
Talk to your tax advisor if you need advice.
6. What if I inherit a property? Does the bright-line rule apply to me?
Property which is inherited does not come under the bright-line property rule when it's sold by the person who inherited the property. However, if any part of the property is acquired other than by inheritance it may be subject to bright-line.
7. What if I received a property as a part of a relationship break-up? Does the bright-line rule apply to me?
If you receive a property as part of a relationship settlement agreement, you will not need to pay income tax on the property when it’s transferred to you.
However, if you go on to sell this property within the bright-line period for this property, the relevant bright-line rule will apply.
MORE INFORMATION
If you’d like advice about tax and your property income, please talk with your tax advisor.
