Who does the Brightline apply to?
This rule applies to all New Zealand Tax residents including who buy overseas residential properties. The bright-line property rule does not apply to properties bought before 1 October 2015.
What is the Brightline property rule here in Aotearoa (New Zealand)?
If you sell a residential property you have owned for less than 5 years you may have to pay income tax. This rule also applies to New Zealand tax residents who buy overseas residential properties.
The bright-line property rule
The bright-line property rule looks at whether the property was either:
• purchased on or after 1 October 2015 through to 28 March 2018 inclusive, and sold within 2 years
• purchased on or after 29 March 2018 and sold within 5 years.
Generally, the bright-line period starts on the date the property's title is registered with Land Information New Zealand (LINZ) and ends when you enter into a Sale and Purchase agreement.
If the property is in another country, the bright-line period starts on the date the transfer was registered under that country’s laws.
The bright-line period for properties purchased 'off the plans' where the title has not yet been issued begins when you sign the agreement to purchase the land.
Selling residential property after the bright-line period ends
If you sell a property outside the bright-line period, the bright-line rule will not apply to the sale. But the intention and other property sale rules will still apply.
Anytime you purchase property with the intention of selling it for a profit you must pay tax on the profit unless an exemption applies.
Residential land withholding tax (RLWT)
If you're an offshore person and have a sale subject to the bright-line property rule, a withholding tax will be deducted at the time of the sale.
The residential land withholding tax (RLWT) should be deducted at the time of sale by your conveyancer. There is no automatic main home exclusion for offshore persons.
Exclusion to the Bright Line Rule
When you sell residential property there are situations when the bright-line property rule does not apply.
- The property is your main home.
- You inherited the property.
- You're the executor or administrator of a deceased estate.
The main home exclusion
If you are selling a property you need to decide if it's your main home. You can only have 1 main home. It is the property you have the greatest connection to.
You can use the main home exclusion under the bright-line property rule if the following 2 situations apply.
- You have used a property as your main home for more than 50% of the time you’ve owned it.
- You have used more than 50% of the property's area (including your backyard, gardens and garage).
It's important to note that having the intention to use the property is not enough, you must have actually used it for this purpose.
You can only use the main home exclusion twice over any two-year period.
If you use part of your house as a business or it has a rental property attached, using more than 50% of the property's area is important. For example, if you use 40% of a property as your home and rent out 60% as a granny flat, you cannot use the main home exclusion if you sell that property.
If you live in more than 1 property
- If you own and live in more than 1 property, you must decide which is your main home. To decide if a property is your main home, think about:
- where your personal property is kept
- the amount of time you spend living in each property
- where your immediate family lives
- where your social ties are strongest
- your use of the home
- what other ties such as employment, business, economic you have with the community.
A main home held in trust
Residential properties held in trust can use the main home exclusion under the bright-line property rule if the following apply.
- The house sold was the main home of a beneficiary of the trust, the principal settlor of the trust, or the principal settlor did not have a main home.
- It is the main home of the principal settlor of the trust, or the principal settlor does not have a main home.
If you need help to work out if your property sale is excluded from the bright-line property rule, talk to us at KREA.
Inheriting a residential property
Property which is inherited does not come under the bright-line test when it's sold by the person who inherited the property. However if any part of the property is acquired other than by inheritance it may be subject to bright-line.