Main home Exclusion: Construction Period for Bright Line Tax

Under the bright line test, disposals of residential land are taxable for different periods depending on when the property was acquired. If residential land was acquired:

• between 1 October 2015 and 28 March 2018, the bright-line period is two years
• between 29 March 2018 and 26 March 2021, the bright-line period is five years
• on or after 27 March 2021, the bright-line period is 10 years, unless the land qualifies for the shorter five-year new-build bright-line test.

Main Home Exclusion Bright Line Tax

For residential land acquired on or after 29 March 2018 and before 27 March 2021, an exclusion is available under section CZ 40 of the ITA if the person disposing of the residential land predominantly used the property as their main home for most of the bright-line period.

If the section CZ 40 main home exclusion applies, income derived from the disposal of the residential land within the bright-line period is not taxable under the bright-line test. If the exclusion does not apply, the income is taxable. The exclusion requires actual use of the property as the person’s main home for more than 50% of the bright-line period.

The Issue with Bright Line Tax

If an individual constructs their main home, the construction period currently does not count as main home use, even if they use the finished property as their main home following the construction. This is because, while the property was being constructed, they were not actually using it as their main home.

This was not a concern prior to covid when the brightline period was 2 years. However, following covid due to disruptions to the construction industry such as lockdowns, supply chain issues and labour shortages it is possible that some may not qualify for the main home exclusion solely because of construction delays.

This issue does not arise in relation to residential land acquired on or after 27 March 2021 as the way in which the main home exclusion now operates has changed and it includes a deeming rule for the construction period.

Proposed Amendments to the Bright Line Tax

The proposed new sections would ignore the period during which the person’s main home is constructed when determining whether the residential land was used as the person’s main home for most of the bright-line period.

The proposed amendments would apply to residential land acquired on or after 29 March 2018 and before 27 March 2021, regardless of whether the residential land has already been disposed of.

Example to explain Construction Period of Bright Line Tax

IRD have provided the following example:

In December 2019, Ben entered into an agreement to purchase residential land “off the plan” in a new development. Construction was due to be completed in early 2021, but due to delays, construction was not completed until June 2022.

 Ben moved into the property immediately following settlement in June 2022 and used the residential land as his main home until December 2023. In December 2023, Ben enters into an agreement to dispose of the property.

Under existing section CZ 39(5), Ben’s bright-line period starts in December 2019 (rather than when the legal title is registered in his name) as he purchased the residential property off the plan. Ben’s bright-line period ends in December 2023.

Ben is subject to income tax under the five-year bright-line test. Under the current law, Ben does not qualify for the main home exclusion because he did not use the property as his main home for more than 50% of his total bright-line period.

He lived in the property for approximately 18 months, but the construction period was 30 months. Under the proposed amendment to section CZ 40, Ben would ignore the 30-month construction period and only look at the period from June 2022 to December 2023 when determining whether he qualifies for the main home exclusion. Ben used the property as his main home for that whole period and therefore would qualify for the main home exclusion.

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