The ‘bright-line’ test has been a hot topic this year. Originally brought in as a simpler way of applying an income tax on speculator’s “flipping” houses, the term originates from US constitutional law where a bright-line rule or test is “a clearly defined rule or standard, composed of objective factors, which leaves little or no room for varying interpretation”. The purpose of a bright-line rule is to produce predictable and consistent results in its application. What is the bright-line test? And what does it mean for Kiwi property owners?
Introduced by the National government in 2015, the bright-line test applied to any person who sold a residential property that was not their primary residence within two years of being bought, between 1 October 2015 and 28 March 2018 inclusive. Any financial gain made on the sale of the property within that timeframe was treated as income and can be taxed. It is the financial gain, not the whole value of the property that is taxed. The profit made from the sale is added to the seller’s income and will be subject to the marginal tax rate. The rule also applies to any New Zealand tax residents who buy overseas residential properties. Exclusions for the rule include a person’s main home, a main home held in a trust, or a residential property that is inherited.
So what are the changes the Labour government has made? In late March, the government announced a suite of changes they believe are designed to “tilt the balance” toward first-home buyers. Among other changes, the bright-line test rule was extended from five to 10 years. New-build properties will still be caught by a five-year rule.
The exception is if the house is the owners “main home”. A main home is where you keep your stuff, somewhere your family lives and where you keep strong social ties. If you have a house that you’ve lived in and also rented out for more than a year, tax is levied proportionally depending on the amount of time it’s been rented. Houses rented out for short stays, like Airbnb’s, are included, unless they are also the owner’s main home. Sellers can use a “main home” exclusion twice in any two-year period to avoid the bright-line test. If you inherit a property, that also is still not included.
Being captured by the bright-line test is not the only way you might have to pay tax on a property sale. If you bought a property clearly with the intention of selling it for profit, in theory Inland Revenue can demand you pay tax, no matter how long you held it for.
We’ve done the research for you! Check out the articles below will help you to understand if you’re still struggling to wrap your head around what this could mean for you…