The Bright Line Test

Understanding the Bright-line Test.

The Bright-line Test came into effect on 1 October 2015, when the Government decided that a homeowner would have to pay income tax if they sold any property that was not a main home within two years from the acquisition date.

From 27 March 2021, this period has been extended to ten years for all homes that are not new-builds, or fall within a list of exemptions.

Date of Agreement

IRD declared that the five-year period will apply for any agreement for the sale and purchase of property that was entered into before 27 March 2021. The new ten-year period will apply for any agreement signed after 27 March 2021.

Exemptions

As mentioned above, there are several exemptions to the Bright-line Test.

The most relevant exemption is the main home exemption, which means that any person selling a property within ten years of the date of acquisition does not have to pay income tax if that property was their main home.

It is important to keep in mind that the main home exemption is not infinite, and can only be used twice in a two-year period.

Change-of-use Rule

It is also important to be aware that the rules of this exemption have changed.

Prior to 27 March 2021, a property was considered a main home for the purposes of the Bright-line test if the owner lived in it or used it as a main home for at least 50% of the time that they owned it.

The Government has introduced a change-of-use rule, which states that, after a sale, income tax will be payable for any period of over twelve months if the property was not being used as a main home.

For example, if a home-owner was to move overseas for a year and a half, income tax would be payable for that period of time as the property was not being used as a main home.

Inheritance

The other situations where the Bright-line Test does not apply are when a person has inherited the property, or they are selling the property as an executor or administrator of a deceased estate.

Need Advice?

Whether you're purchasing your first home, selling an investment property, or growing your property portfolio, understanding the tax implications of property ownership is important.

If you have questions about the Bright-line Test or how it may apply to your circumstances, contact the team at Sutcliffe Matson Law for tailored advice.

Braden Matson

Email: braden@smlaw.net.nz
Phone: 09 279 8351 ext 204

Breanna Fuller

Email: breanna@smlaw.net.nz
Phone: 09 279 8351 ext 212