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Property Accountants: The bright-line property rule

 

Unless an exclusion exists, you might be required to pay income tax on any gain from the sale of a residential property you’ve owned for less than ten years. This is known as the “bright-line property rule,” and it is also applicable to tax residents of New Zealand who purchase homes abroad.

When purchasing a property before October 1, 2015, the “bright-line property rule” does not apply.

To determine if the property you are buying or selling is taxable under any of the property rules, including the bright-line property rule, go to the “Property tax decision tool” at the foot of this page.

The bright-line rule for properties

When determining whether a property falls under the bright-line property rule,

on or after March 27, 2021, and sold between March 29, 2018, and March 26, 2021, and sold within the 2-year bright-line period between October 1, 2015, and March 28, 2018, and within the 5-year bright-line period for qualifying new construction, or within the 10-year bright-line period for all other properties.

Getting approved for the 5-year bright-line period for new construction

When a house is bought

A property is often considered to have been acquired for tax purposes when a legally binding sale and purchase agreement is signed (even if some standard conditions like getting finance or a building report still need to be met). On our Tax technical website, under “QB 17/02,” you can find detailed information about when a property is acquired.

Which bright-line period—whether it is for 2, 5, or 10 years—applies is determined by the date you buy property.

The major house exclusion restrictions that will apply to your property will also be determined by this.

Start and end dates for the bright-line period

The bright-line period often begins on the settlement date, which is the day you officially acquired title to the property, and ends when you sign a legally binding sale and purchase agreement to sell the property. Different regulations apply to properties purchased off the beaten path.

If a purchase was completed as a result of an offer made by the buyer on or before March 23, 2021, and that offer could not have been withdrawn before March 27, 2021, the property is considered to have been acquired prior to March 27, 2021. Therefore, the 5-year bright-line period is in effect.

Income tax – date of land acquisition and beginning of the 2-year bright-line test

selling a house after the bright-line time has passed

If you sell a property outside of the applicable bright-line period, the bright-line property rule does not apply. However, additional property sale guidelines will continue to apply if you:

bought the property with the clear intention to sell it; you have a history of buying and selling your primary residence; someone you are affiliated with is engaged in the business of dealing in, developing, or creating real estate; and the property was acquired for that purpose.

Exemptions and further relief

In general, when you sell a property that has served as your primary residence, the bright-line property rule does not apply. Farmland and commercial properties are also excluded.

Depending on whether your primary residence was purchased before, on, or after March 27, 2021, different restrictions may apply.

Absences from the bright-line rule

Additional relief is accessible for some kinds of ownership transfers:

Transfers of ownership and rollover relief

tax on residential land reversion (RLWT)

Unless a valid certificate of exemption is held, a withholding tax will be taken out at the time of the sale if you are an offshore RLWT person and the transfer is subject to the bright-line property rule.

Your conveyancer should deduct the residential land withholding tax (RLWT) at the time of the sale. For offshore residents, there is no automatic principal house exclusion.

tax on residential land reversion (RLWT)

Form IR833: Bright-line Residential Property Sale Information

If you sold a bright-line property during the year and are showing the proceeds of the transaction on your income tax return, complete this.

Fill out the IR833 form for Bright-line residential property selling information.

Use our property decision tool to determine whether income tax may be due on a property transaction.

The bright-line property rule

Who can buy a home and sell it for more than 10 years? Those who buy overseas properties in New Zealand also need these rules. This Bright Line Property Policy will not apply to property purchased in the first week of October 2015.

Our guide outlines how and when the Bright-Line Rule applies, alternative property taxes that may still be payable, tax assessment, exceptions, as well as must-know facts and frequently asked questions.

Originally updated February 15, 2019. Summary The guide includes the following information: Can you define ‘bright lines’? It is called the Bright Line rule in the US, and the rule is clear and has no room for different interpretations in many countries. It also entails a lack of inconsistent applications like income tax and GST that are fair to everyone.

Inherited Property

It also covers no inherited properties. If a parent dies and gives up the property in your family, you will pay no taxes.

Q: What tax rate will I pay?

You pay the marginal income taxes. The marginal rate is 33 % of taxable earnings. Profit is taxed on all purchases of real estate at 33%. When you make a salary of $50,000 you are split into two groups of incomes. You’re paying 30% tax on all earnings of $70k plus 33% on everything else. The first $250,000 of your purchase of a property will pay tax at 30%. The other $230,000 will receive 33%.

Will We See A Capital Gains Tax Introduced In New Zealand?

Capital gains tax may not be triggered soon. Prime Minister Jacinda Ardern has said she has been forced to accept the fact that New Zealanders are opposed to the tax.

What Impact Would A Capital Gains Tax Have On Residential Property Investors?

Even though capital gains are taxed, the new rules won’t affect property owners much at all. Kiwis often use home equity as a means to expand a portfolio. It’s not a very attractive investment. Taxation on earnings will not necessarily result in wealth being put into other types of assets. Increasing the Brightline tax rate could potentially affect the housing market and lead to the loss of value in some markets. If the property market does not change it might cause more sales to increase.

If you hold the property for more than 10 years

And you can certainly avoid taxes if you buy or sell a property 10 years later. If a person meets the above requirements, capital gains tax obligation may apply. This usually occurs if your family or friends are involved with property sales, development, and buying-and-selling activities. In such cases, the property tax adviser will advise you on the correct way to pay tax for the sale of property.

What is a bright-line test NZ?

What percentage is the bright-line test?

How do I avoid bright-line tax NZ?

How long is the bright-line period?

When did the bright-line test come in NZ?

Does the Brightline test apply to new builds?

What is the Brightline period?

How do I avoid Brightline tax?

When did Brightline change 10 years?

Is the 10 year bright-line test retrospective?

What is the bright-line rule NZ?

How much tax do I pay under Brightline?

Does Brightline apply to family home?

What triggers the bright-line test?

Are new builds exempt from capital gains tax?

What qualifies as a new build NZ?

How does the Brightline test work?

When did the Brightline tax come in?

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Andy Garvy
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The team at outside are a dedicated bunch. They go above and beyond in every situation and provide so much more than your standard tax accounting. They have developed process maps, management reports, managed our invoicing, payables and pretty much taken care of every part of our business when we have needed it. They are a big part of our business and will continue to be moving forward.
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A great team - striking the right balance between professional, knowledgable accountants while being fun and personable to deal with. Always quick to respond. Harri has prepared my end of year statements and GST returns. I'm based in Auckland and have managed to snag a spot at the "co-working desk" in their office a couple of times while I'm down in Wellington.
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These guys are not the typical accountants. We engaged with Outside originally for our small business accounting needs, but over the years they have provided invaluable services above and beyond. We have grown as a business and Outside worked alongside us the entire time, supporting us with expert and professional advice throughout our journey. They are an awesome bunch, so easy to get along with, they break everything down into regular speak and no question is too dumb to ask. Their door is always open, everyone is super welcoming and they make a mean coffee.
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