BRIGHT-LINE TEST RULES FOR SELLING A PROPERTY

WHAT DOES THE BRIGHT-LINE TEST MEAN?

February 19, 2024 - The bright-line test is a government property tax applied when selling investment properties, based on the increase in value over a specific period of time. The date you acquire an investment property determines which bright-line period applies for paying this property tax - whether it is for 5 or 10 years.

BRIGHTLINE RULES, DATES, EXEMPTIONS

Under the current bright-line test, if you sell a residential property within 10 years after buying it, you are required to pay tax on any profit made through the property increasing in value. This will be dependent on the date it was purchased i.e. on or after 27th March 2021 although an exception may apply.

If you purchased prior to 27th March 2021 and sell within a five year period, the five year bright-line test will apply. Scroll for further dates and rules.

The family home and inherited property are exempt from the bright line test.


If you're thinking of selling a rental property, find out how much it costs to sell a house in 2024.


For a quick reference as to whether you are affected by the rules, see the IRD flow chart below.

BRIGHTLINE RULES FOR SHORT-STAY ACCOMMODATION

Residential property used to provide short-stay accommodation is also subject to the bright-line test if the accommodation is provided in a dwelling that is not the owner’s main home.


Planning to sell your investment property? Request a shortlist of vetted real estate agents - a genuine free NZ service.


CHANGES TO CLAIMING INTEREST ON RENTAL PROPERTY 

The 2021 changes also meant property investors are not able to offset their mortgage interest expenses against their rental income when calculating their tax - although this change is being phased in through to 2025 for property loans acquired before March 27, 2021.

The amount someone can now claim:

  • April 1 2022-March 31 2023                             75% Claim
  • April 1 2023–March 31 2024                            50% Claim
  • April 1 2024–March 31 2025                            25% Claim
  • From April 1 2025 onwards                                0% Claim

How much real estate commission should I pay?


BRIGHTLINE 'CHANGE OF USE RULE' FOR THE MAIN HOME

Group of four young renters taking a funny selfie poking their tongues out.

Any home that has been the owner's main home for the entire time they owned it is exempt from any bright-line test.

However, for residential properties acquired on or after March 27, 2021, including new builds, a 'change-of-use' rule applies. This affects the main home if it is not used as the owner's main home for more than 12 months at a time within the applicable bright line period.

Income tax is due on a proportion of the profit made through the property increasing in value, calculated as follows:

• subtract the purchase price from the sale price

• subtract the cost of capital improvements the owner has made

• subtract the costs to buy and sell the property, and

• multiply the result by the proportion of time the property was not being used as the owner's main home.

TAKE THE BRIGHTLINE TEST USING IRD CHART?

Flowchart explains whether who is affected by the brightline test

HOUSE SALE PROFITS AFFECT WFF AND MORE

long-range view of rugged hills overlooking queenstown, new zealand

Any profit from a gain in property value that is considered taxable income (including under any of the bright-line tests) also affects any other obligations or entitlements you have based on taxable income, such as student loan repayments, child support payments and Working for Families.


OTHER LAND SALE RULES STILL APPLY

There are other rules in the Income Tax Act 2007 that can tax gains on the sale of land (including residential land).

For example, there are tax rules that apply to speculators, land developers and dealers. Those rules continue to apply, regardless of when the property was purchased. The bright-line tests potentially apply only if none of the other land sale rules apply.

Regardless of the bright-line tests, anytime you purchase property with the intention of selling it you must pay tax on the profit unless an exemption applies.


Thinking of selling your property? Find out how long it takes to sell a house


Agent Finder NZ Service Awards to property sellers:

  • Property Advisor of the Year 2023 (Property Institute of NZ - APAC)
  • Best Independent Real Estate Advisors 2022 | BUILD 2022 Property Awards
  • Best Property Advice Hub New Zealand 2021 | APAC
  • Most Reputable Property Advice Hub New Zealand for Wise Up NZ 2020 | APAC
  • Best Real Estate Agent Vetting Service 2018 | APAC

Updated February 19, 2024 by Trish Willis | Member of the Property Institute of NZ (IPAC)

Disclaimer: The content of this researched article is general in nature and not intended as a substitute for specific professional or legal advice on any matter and should not be relied on for that purpose
Make Enquiry › Related Entries Posted in:  None

Get In Touch


smarter-selling-kit-for-home-sellers


Google Reviews for Agent Finder NZ