Bright Line Test(BLT) Extension.
The bright-line test property rule means if you sell a residential property within certain timeframe you might have to pay income tax on any gains. This rule does not apply to a person’s main home and inherited properties. The current period of holding for a property is 5 years in order to not attract capital gains. The income will be taxed at the marginal rate for individuals.
The Government intends to extend the period to 10 years except new builds and legislation will be enacted after consultation.
Below flow-chart has been released by the IRD to determine what is the length of BLT a property is subject to:
This means, if you have acquired the property before 1/10/2015, the property is not subject to the BLT. There is no need to pay tax on any gain in value.
If you acquired the property on or after 1/10/2015 but before 29/3/2018, which is not used for one’s main home nor inherited, the property is subject to a 2-year BLT. You will need to pay tax on any profit from gain in value of the property if you sell it within 2 years.
If you acquired the property on or after 29/3/2018 but before 27/3/2021, which is not used for one’s main home nor inherited, the property is subject to a 5-year BLT. You will need to pay tax on any profit from gain in value of the property if you sell it within 5 years.
Any property acquired on or after 27/3/2021 (except new build, main home, and inherited property) will subject to a 10-year BLT. You will need to pay tax on any profit from gain in value of the property if you sell it within 10 years.
*Acquiring date: For tax purpose, a property is generally acquired on the date a binding sale and purchase agreement is entered.
*Main home: Residential property that has been used as the owner’s main home for the entire time. If there is a change-of-use of a property in between, and it is subject to the BLT. Then, the tax will be calculated based on the proportion of time not being used as the owner’s main home.
The main reason of extending BLT is to deter investor to invest into New Zealand residential property market. This is a kind of capital gains tax. We will have to wait to witness the true effects of this extension. The effects will be visible in the second half of the year. Capital gain tax in overseas has not worked as a deterrent to invest into the property market. It would be interesting to see how this would workout in New Zealand.
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