Property tax update from Mitchell Mackersy
Whether you’re a first-time buyer or you buy and sell property all the time, it’s important that you understand your tax obligations, and the rules such as bright-line.
As a rule, if you’re buying a property with the intention of selling it, you’ll probably have to pay tax on any profit you make. Under existing land tax rules, gains from the sale of land are taxable when the land is bought with the intention of resale (“intention test”). The bright-line test was introduced to supplement the existing land tax rules. The bright-line property rule says you’ll pay tax when you buy and sell a residential property within five years, unless an exception applies. It’s easy to know if this rule applies in your situation.
When does the bright-line rule apply from?
The bright-line rule applies to the sale of any residential property purchased on or after 1 October 2015 as follows:
• If you bought a residential property between 1 October 2015 and 28 March 2018 inclusive, the two-year bright-line rule applies.
• If you bought a residential property on or after 29 March 2018, the five year bright-line rule applies.
However, any time you buy a property intending to resell it, you’ll need to pay tax on any profit you make when you sell that property.
When does the bright-line period start?
Generally, the bright-line period starts on the date the property title is officially transferred to you, which is the date the property transfer is registered with Land Information New Zealand (LINZ). If the property is in another country, the bright-line period starts on the date the transfer was registered under that country’s laws. Different dates apply if you sell the land before your purchase was registered with LINZ or if you bought the land as a result of a subdivision of property (for example as a sale “off the plans”). If you sell a property outside of the relevant bright-line period for you, the bright-line rule won’t apply to your property sale, but the intention test may still apply.
What types of property does this rule apply to?
The bright-line rule only applies to residential property. A property isn’t residential if it’s mainly used for business or as farmland. That means when you sell farmland or business property, the bright-line rule won’t apply. But you’ll still need to follow existing tax rules.
Exceptions to the bright-line rule
There are three main exceptions that apply to property transactions in which the bright-line test will not apply. These three exceptions relate to:
• The sale of your main home;
• Inherited property; or
• Relationship property.
What does “main home” mean under the bright-line rule?
To qualify for the main home exception, the property must have been used as your main home for 50% or more of the time you have owned it. You also need to use more than 50% of the area of the property as your main home. (The area that counts as your main home generally includes things like your yard, gardens and related buildings like the garage.) This is an important point if you rent out a granny flat attached to your house or part of your house is used as a business. As an example, if you use 40% of a property as your home and 60% as a rental property, you can’t use the main home exception if you sell that property.
My main home is held in trust. Am I eligible for the main home exception if I sell it?
Residential properties held in trust can use the main home exception under the bright-line rule if:
• the house sold was the main home of the principal settlor of the trust, or the principal settlor didn’t have a main home, and
• it was the main home of a beneficiary of the trust.
The principal settlor of a trust means the settlor whose settlements to the trust have been greatest by market value. In other words, the principal settlor is the person who has made the biggest financial contribution to the trust.
How and when do I pay the tax I owe on income I’ve made from a property sale?
If you sell your property within the bright-line period which applies to your property, you’ll need to complete an income tax return. You’ll generally include the amount of property income you’ve earned in the “other income” box on your return. You’ll also complete an IR833 Property Sale Information form, which you should receive from the IRD by post after your sale has settled. You will be allowed deductions against your gains on sale according to ordinary tax rules.
If you would like more information about the bright-line rule, please contact us or view the IRD’s questions and answers on the bright-line rule here.