Worried about changes to property tax laws?
It can be hard to keep up and know what you need to do, now that everything has changed. OneTeam Partner Manoj Vagh explains…
What Does “BRIGHT LINE” mean?
The Bright Line test has been around since 1 October 2015 and the test requires income tax to be paid on amounts derived from the disposal of residential investment land within the bright line periods:
Two-year rule – 1 October 2015 to 28 March 2018
Five-year rule – 29 March 2018 to 26 March 2021
There are three residential property exclusions from the Bright Line Test
Your Main Home
Your Inherited Property
If your property transfers to an Executor or Administrator of an estate
Remember that the bright line rules do not apply to residential property predominately used as a business premise or farmland.
What's New?
The New TEN-YEAR rule is effective from 27 March 2021
What are the changes to the rules?
The government has extended the bright-line test to 10 years. The bright line is effectively a capital gains tax.
The main home exclusion has been amended and now tax must be paid on gains made for periods the property is not used as the owner’s main home.
Newly built homes can still use a 5 year bright-line test.
Property owners cannot now claim interest on loans used for residential investment properties. This will start from 1 October 2021 and will be phased in over a 4-year period. It is likely that there will be an exemption for interest claimed on newly built homes.
Have a look at this example of a home being rented
Paul buys a residential property in June 2021 for $1,500,000.
Paul lives in this property as his main home for 6 years until May 2027.
Paul rents out the property to Ray for 2 years from June 2027.
At the end of the tenancy in May 2029 Paul decides to sell the property for $2,000,000
The property was Paul’s main home for 6 of the 8 years he owned it. He will be required to pay tax on the 2 years it was rented. The gain on sale is apportioned using the “straight-line” method, so he will need to include 2/8th of the $500,000 profit which is $125,000.
He will be required to file an IR833 form in March 2030 and add the amount of $125,000 to his income tax return. He will pay tax at his marginal tax rate.
Please note that public consultation on new builds and interest deductions is taking place now so the rules are not confirmed yet. Legislation would most likely be retrospective.
Remember that every property purchase and sale is registered with the Land Transfer Office.
These records are examined by the IRD.
You should expect that the IRD will be questioning every purchase and sale within the bright line periods.
Therefore, please keep detailed financial records including any holding costs (repairs, rates, insurance, interest, agents fees) and the costs of improvements.
These should be kept for at least 10 years because the normal IRD requirement of 7 years record keeping will not be sufficient now the bright line has been extended.