Changes to the Bright Line Test
Adrien Turnage
July 2024
Changes to the Bright Line Test for Residential Property from 1 July 2024
If you sell a residential property in New Zealand, any profit which arises from the sale will be taxable under the bright line rules unless specific exclusions or rollover relief applies. The bright line test applies only to residential property and does not apply to property used predominantly as business premises or farm land.
Two Year Bright Line Test
Prior to 1 July 2024, profit from the sale of residential property was taxable if that property was sold within 10 years of being acquired, or within 5 years for new builds.
From 1 July 2024, the old tests have been repealed and replaced with a new two-year test. The new test applies to all residential property sold on or after 1 July 2024. This is likely welcome news for anyone who purchased a property before 1 July 2022.
The important dates for determining if the Bright Line Test applies are the “Bright Line Start Date” and the “Bright Line End Date”. For a typical purchase:
- the Bright Line Start Date is the date on which the title to the property is transferred to you (i.e. the settlement date); and
- the Bright Line End Date is the date that you enter into a binding Agreement for the sale of the property.
Different rules apply for more complex transactions, for example, buying off the plans or gifting property.
Main Home Exclusion
The Bright Line Test does not apply to the sale of your main home. The criteria for the main home test has changed from 1 July 2024. In order to claim the main home exclusion you must have used more than 50% of the property’s area as your main home and have lived in the property as your main home for more than 50% of the Bright Line period. If either of these are less than 50% then you cannot claim the main home exclusion when you sell the property.
For example:
- If you live in 40% of the property and rent out 60% of the property as a flat then you cannot claim the main home exclusion.
- If you buy the property to live in but after 6 months you move to another property and a family member lives in the property for another year before you sell it, then you cannot claim the main home exclusion.
You can only claim the main home exclusion twice within any two year period.
Rollover Relief
You can claim rollover relief where the property is inherited from a deceased estate or transferred under a Relationship Property Agreement. From 1 July 2024 rollover relief also applies to transfers between associated persons provided that they have been associated for at least two years before the transfer date. When rollover relief applies, the Bright Line Test looks at how long both you and the previous owner have held the property for (as if the property has stayed in the same ownership since the Bright Line start date).
Associated persons includes specific relationships between companies with common ownership, and between certain shareholders and companies, between relatives, between trustees and beneficiaries and settlors of a trust and between partners and partnerships. Rollover relief can only be claimed under the associated persons rules once in any two year period from the date of the first transfer.
Get in Touch
If you are considering selling your property, contact us at Pitt & Moore on 03 5488349 first to ensure that you understand your Bright Line position in light of the recent changes.