What Is The Bright-Line Test For Residential Property?

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Investors in residential property need to be aware of the “bright-line test for residential land” which has been in effect since 1 October 2015. Since that date gains on the proceeds of sale of residential property acquired and disposed of within a two year period are liable for income tax, subject to certain exclusions. Recent changes to the bright-line test have extended the period to five years. Residential land purchased after 29 March 2018 and disposed of within five years can create a liability to income tax, with certain exceptions. Property acquired prior to that date can still fall inside the two year period so please discuss your plans with us before beginning the process.

Residential land has a particular definition in the Income Tax Act 2007 but essentially it includes land zoned for residential purposes, whether or not it has a house erected on it – and can include land subdivided from a larger plot of land. For example, if you bought a large property intending to use it all as your family home but within the five year bright-line period you changed your mind and decided to sub-divide a section off and sell it the proceeds may be liable to income tax depending on the timing of the subdivision and sale of the unwanted section of land.

The bright-line test will not apply if you are already liable for income tax on the sale of property due to your intention to dispose of the property when it was acquired, or because you are involved in a land-related business such as a property developer or as the owner of a business that buys and sells land or a building business.

Exclusions
One of the purposes of the bright-line test is to “target people who seek to make a profit from property speculation”, and as such it excludes property used as your main home, inherited property and property sold subject to a relationship property agreement.

The “main home” exclusion does not apply when you have used the exclusion two or more times within the two years immediately prior to the bright-line date or if you have a regular pattern of buying and selling residential land.

What should you do?
The main thing is for you to be aware of the potential five year window that the bright-line test creates (two years if acquired prior to 29 March 2018) and if you have concerns that you may be liable for an income tax assessment on the profit from the sale of your property then talk to Smith and Partners to ensure you understand the timing of the bright-line date in your specific circumstances. 

Bright-line Test Expert

Are you looking to sell property that may be subject to the Brightline Test? Ensure you get the right advice before you sell.
Contact tax law expert Bret Gower today to set up an appointment.

Phone: 09 837 6893       
Email: bret.gower@smithpartners.co.nz