Since the extension of the residential property bright-line test earlier this year to 10 years, I’ve been asked questions by several property owners about their situation and tax implications. I am not a tax professional nor an investment advisor and I always advise anyone to get professional tax advice on their own situation, and, if necessary, even get a second opinion.
What is clear is that not everyone is aware as they should be on property tax law, particularly the bright-line test, which is really a capital gains tax on property value gains, other than the family home. If you are a landlord, like many mum and dad property investors, you should be well aware of your tax liabilities, including potential liabilities, especially if you are thinking of selling. A point that has gone unnoticed by many property owners is that even if you meet the bright-line test criteria, you could still be liable to tax on sale profit, depending on your property dealing history and intention. If you habitually buy and sell your “family home” within a relatively short time frame you are likely to come under the IRD’s scrutiny. In summary the test is essentially whether your intention was to make a profit on the sale of the property, which is generally everyone’s unstated intention. This test however, as tax accountants will tell you, captures more people than you might imagine.
Firstly, let’s acknowledge it’s not uncommon for legislation to have unintended consequences. That could certainly be said of the residential tenancy laws introduced earlier this year, but more on that another time. The bright-line test was introduced as a means of discouraging people from profiting from property speculation. Did it succeed? Well, I’d have to say it has not been as effective as our politicians would want. Hence, the bright-line test period has been increased twice since, to five years and then, earlier this year, to 10 years.
If you view the Inland Revenue’s website you’ll read that the bright-line test applies to anyone buying and selling property on or after 1st October 2015 (https://www.ird.govt.nz/property/buying-and-selling-residential-property/the-brightline-property-rule). Although that first two-year timeframe is virtually irrelevant now as the test that applied for property bought between 1 October 2015 and 28 March 2018 expired in March 2020. The two periods that are more relevant for the bright-line test now are:
- Property bought between 29 March 2018 and 26 March 2021 and sold within five years.
- Property bought on or after 27 March 2021 and sold within 10 years.
When does IRD regard you as having bought a property? This is quite an important detail and one that can cause confusion because there are two dates IRD uses in judging when a property is “sold”:
- The bright-line period “is generally counted from the date you bought the property which is the date the land is transferred to you (generally the settlement date)”.
- However, for other tax purposes, the department deems a property is acquired “on the date a binding sale and purchase agreement is entered into (even if some standard conditions like … finance and building report still need to be met)”. This can be weeks and months earlier than settlement. It’s an important distinction.
The bright-line test, in my opinion, is a capital gains tax by another name. It has not been effective till now and many will view the 10-year extension as misguidedly harsh. The effect is likely to be felt by some who have bought holiday homes, for example, in recent years and through a change in circumstances want to sell. They are also doubly hit by the change in residential tenancy laws, meaning that short-term rentals open them now to consequences that were likely never intended. But that’s another story.
The stated intention of the legislation was to discourage people from investing in housing or real estate, but most sophisticated investors are very aware that real estate is still a very sound investment albeit requiring a long-term hold or paying tax on the profits.