The Far Reaching Bright-Line Test – Now from 2 Years to 5 Years
The bright-line test (whereby property sellers are taxed on the gains of a sale of a non-main home) has now been extended from 2 years to 5 years. This can have a far reaching effect even on those who do not see themselves as property flippers.
As of 29 March 2018, if you purchase a residential property (that is not your main home and does not come within the other limited exemptions) and you sell it within 5 years, you could be taxed on the gains.
The bright-line test will then impact upon those who are buying investment or holiday properties, those who were hoping to do up and flip their homes within a few years, and even those who did not plan a quick resale but have had to due to unforeseen changes in circumstances.
Test Applies to Residential Land Only
The test only applies to residential land being land with a dwelling on it or land that is capable of having a dwelling on it. Business premises or farmland are excluded.
Timing for Test
Vendors should bear in mind that the 5 year period extends from the date of acquisition (date of transfer on LINZ) to the date of disposal (not the settlement date but the date the contract for sale was entered).
For residential properties purchased under agreements that were dated before 29 March 2018, the previous two year timeframe applies and for those dated prior to 1 October 2015, the bright- line test does not apply.
Only limited exemptions to the test apply, including selling the main/ family home and property transfers to executors for estates.
However, the main home exemption may only be used twice by a vendor within the 5 year period. This is to prevent vendors trying to claim the exemption and avoid tax on multiple sales within a short period of time.
Dealers, Developers, Associated Persons and RWLT
The rules are even heavier for those in the property industry, such as dealers and builders, or even those associated to such persons. If you show a pattern of buying and selling, you can be taxed even on your main home. In that regard, professional advice from your tax adviser should be sought before selling, or even before buying if you plan on selling the property in a short period of time.
As well as the bright-line test, vendors should consider if RWLT will be deducted at the time of sale and also if you are an offshore RWLT person.
Unfortunately, many vendors do not consider the implications of tax on gains before they enter their sale agreement. A vendor should seek professional advice from their lawyer and also an appropriate accountant on the potential tax implications before they sell their property.