Is the sale of my property subject to tax?

The “bright line test” was introduced in 2015 in an effort to tighten the property investment rules. Originally the bright line test provided (subject to exemptions) that any gain received from the disposal of a residential property, within two years of its acquisition, was taxable. The government extended the bright line from two years to five years on the 29th March 2018.

It is important to note that the test only applies to residential land and does not include farms or commercial/business premises.

The two year bright-line test still applies to residential land purchased on or after 1st October 2015 to 28th March 2018. The five-year bright line test applies to Residential property purchased on or after the 29th March 2018. There is and always has been a general rule, regardless of the two and five-year tests, that when you buy a property with the intention of reselling it you will need to pay tax on any profit you make when you sell that property.

Generally, the bright line period starts on the date the property title is officially transferred into the purchaser’s name, which is the date the property is registered with Land Information New Zealand (LINZ). The end date for the bright line test is the date that you enter into an agreement to sell the property to another party.

If the property you are selling is your main family home you are exempt from having to pay tax on any gain made from its sale. Likewise, if you received the home as part of an inheritance or it was transferred into your name as an executor/administrator of a deceased estate. The main family home exemption can only be applied to one home. If a person has more than one home i.e also has a family holiday home, your main family home will be considered the home that you have the greatest connection with.

Factors to assess when determining what constitutes a main home include; how often a person uses the home, where their immediate family is, where their social and economic ties are and whether their personal property is in the home. The test is based on actual use of the property and not just a person’s intention to use the property as a main home. This exemption cannot be applied on a proportionate basis. Therefore, if a house is used only partly as a main home, the exemption does not apply. Where a main home is held in a trust, the exemption is usually available, however additional information is required to ensure trusts are not used to avoid tax.

A habitual seller cannot use the main home exemption. If a person has used the main home exemption more than twice in the previous two years at the time of selling their property, they are considered a habitual seller. A habitual seller also includes a person who regularly acquires and disposes residential land. Where property is inherited by a person as a beneficiary and they subsequently sell the property, the disposal will not be subject to tax under the bright-line test. Where property is transferred between partners or spouses under a property relationship agreement, there are no tax implications. However, if the property is subsequently sold; the bright-line test may apply.

There have been cases where tax obligations arose through the disposal of residential property which did not result in financial gain to the seller. If you are concerned that you may be caught by the bright line test it is important that you obtain sound taxation advice before selling a property.

(Article first published in the Hamilton Press, June 2018)