A Government bill to reduce the Bright-line Test to two years comes into effect today, 1 July 2024.
Bright-line Tax
Prior to 1 July 2024, if you sold a residential property in New Zealand that you owned for less than 10 years, you would have been required to pay income tax on any capital gain on the sale, unless an exclusion (like the ‘main home exclusion’ or ‘rollover relief’) applied.
That timeframe has now been reduced to two years.
For a property sold on or after 1 July 2024, the Bright-line Test examines whether your Bright-line end date is within two years of your start date. For a purchase, the start date is generally the date the property’s title is transferred to you (the settlement date).
For a sale, the end date is generally the date when you enter into a binding Agreement for Sale and Purchase (and not the settlement date). This distinction is important, as sellers who enter into an Agreement within two years of the start date could be caught with Bright-line Tax, even if settlement occurs after two years.
The most commonly used exemption to the Bright-line Test is the ‘main home exclusion’. This particular test has reverted to the original assessment in 2018, whereby a seller can claim the property as their main home if they have used more than 50% of the property’s area as their main home (including the yard, gardens, and garage) AND they have lived in the property as their main home for more than 50% of the bright-line period.
For example, if you sell a property within one year of purchasing, but you have lived in it as your main home for at least six months, and you use more than half of the property as your main home, you would be able to claim the main home exclusion.
Other exemptions include certain transfers from a Trust to a Settlor, inheriting a property (but beware of the previous owner’s intentions), being the executor of a deceased estate, and receiving a property as part of a relationship property agreement. These exemptions are very circumstance-specific, and we recommend obtaining legal advice before relying on one of these.
Interest Deductibility
Claiming interest as an expense for residential property in New Zealand is also being phased back in. From 1 April 2024 you can claim 80% of the interest incurred for funds borrowed for residential properties. From 1 April 2025, interest deductibility will be fully restored and you can claim 100% of the interest incurred.
Effect on Property Market
A reduced Bright-line Test to two years and the re-introduction of interest deductibility is likely to result in more residential property investment, as investors no longer have to hold on to property for 10 years to avoid paying Bright-line Tax.
Similarly, sellers who have held on to rental properties may look to sell if they are outside of the new two-year timeframe.
First home buyers may be affected the most by these changes. Residential property investors tend to target properties of a similar price and quality as first home buyers, but conversely, there may be more properties on the market for first home buyers to choose from.
The net impact on house prices is yet to be seen, as this will be determined by the respective supply and demand of housing in those price brackets.
Next Steps
If you are considering selling a property in the near future, we recommend seeking legal advice to confirm your start date and end date, and whether any Bright-line Test exemptions apply, before putting pen to paper.
If you are considering purchasing an investment property or transferring property to or from a Trust, we also recommend seeking specific legal advice before progressing.
