Bright-line Test
From 1 October 2015, the Parliament introduced some changes to the property rules called as Bright-line test. The purpose of the test is to reduce the number of foreign speculators on NZ property and thus maintain positive housing prices of big cities in New Zealand. This rule only applies to residential properties bought on or after 1 October 2015. The idea behind the test is that taxpayer has to pay tax on the gain when you selling your property (with some exceptions). By taxing on the gain, it somewhat discourages speculators for housings as the profit is not as good as before.
The rule says that taxpayer will pay tax when they buy or sell a residential property within two years, unless an exception applies. Other property rule still remains the same. It means that if you have any other residential property other than your main home and you sell it within two years, the gain on sale will become taxable.
Thus, the concept of main home under the bright line test is very important. The IRD defines the main home as taxpayer need to have used a property as their main home for 50% or more of the time that you’ve owned it. Moreover, taxpayer also needs to use more than 50% of the area of the property as your main home. This means that if you rent your house out and use less than 50% of the area in the house. You cannot use that property as your main house under the bright-line test. Other factors the IRD will take into consideration to determine the taxpayer’s main house as below:
- Where your personal property is kept
- The amount of time you spend living in each house
- Where your immediate family lives
- Where your social ties are strongest
- You use of the home
- What other times (employment, business, economic) you have with the surrounding community.
- There is a main home exception to the bright-line rule. The rule does not apply to your main home; it means that you do not have to pay tax even though you sell your main home within two year. However, taxpayer must be careful about their intention with their purchase. The IRD also makes it clear that the sale of a third property in two years will still be taxable as the main home exception does not apply.
- The bright line rule also does not apply if you sell a property you inherited
- The main home exception applies even if your property held in a trust. However, taxpayer must prove that the house was the main home of the principal settlor of the trust and it was the main home of a beneficiary of the trust.
- If the taxpayer sells their property outside of the 2 years period, bright line test will not apply. However, they need to consider the intention tests. If they have an intention to make profit on the property, it will still be taxable income for the seller.
- If the property sells under the bright line test and it makes a loss, you can use the property losses to offset with income you earn. Please note: Losses can only offset against income gain on sale of property (not on wages and salaries income). You can carry forward the loss.
- Income gain from the sale of property is your taxable income.
Exclusion to the test
- There is a main home exception to the bright-line rule. The rule does not apply to your main home; it means that you do not have to pay tax even though you sell your main home within two year. However, taxpayer must be careful about their intention with their purchase. The IRD also makes it clear that the sale of a third property in two years will still be taxable as the main home exception does not apply.
- The bright line rule also does not apply if you sell a property you inherited
- The main home exception applies even if your property held in a trust. However, taxpayer must prove that the house was the main home of the principal settlor of the trust and it was the main home of a beneficiary of the trust.
- If the taxpayer sells their property outside of the 2 years period, bright line test will not apply. However, they need to consider the intention tests. If they have an intention to make profit on the property, it will still be taxable income for the seller.
- If the property sells under the bright line test and it makes a loss, you can use the property losses to offset with income you earn. Please note: Losses can only offset against income gain on sale of property (not on wages and salaries income). You can carry forward the loss.
- Income gain from the sale of property is your taxable income.
Other matters
- If the taxpayer sells their property outside of the 2 years period, bright line test will not apply. However, they need to consider the intention tests. If they have an intention to make profit on the property, it will still be taxable income for the seller.
- If the property sells under the bright line test and it makes a loss, you can use the property losses to offset with income you earn. Please note: Losses can only offset against income gain on sale of property (not on wages and salaries income). You can carry forward the loss.
- Income gain from the sale of property is your taxable income.
Disclaimer: The following answer necessarily sets out general principles only. The facts of particular cases always need to be considered carefully, and it may be necessary to obtain advice from a tax expert.
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