You may be aware that there is currently a 2-year and 5-year Bright-line test that the Inland Revenue Department has introduced.

The 2-year rule applied from October 2015. This was extended to a 5 year rule for any property purchase from 29 March 2018. The Bright-line test taxes any residential land or residential investment property that is sold within 2 years or 5 years of purchase that is not the family home.

• Exemptions

  • You cannot have more than 1 family home for the purposes of applying a family home exemption. So, if you own a holiday home that is sold within 2 years of purchase you will be caught by this tax.

  • Care has to be taken where you have a rental property that you have subsequently moved into such that the property becomes eligible for the family home exemption. In that instance you need to have lived in the house for at least the same amount of time as it was rented for it to change its status to your family home.

  • So this rule is to stop you moving into a rental for a very short period of time and then selling the property in an attempt to avoid the rules.

• Example

  • You purchase a rental property in January 2017. The property is rented for 9 months and you then move into the property. The property is sold 6 months later. Although the property at the time of sale was your family home as you had only lived in the property for 6 months but rented it for 9 months, you would taxable on any gain you make on the property sale.

• Change to a 5 year rule

  • Under the latest rules, for recent purchases you must own the rental property for at least 5 years before you can sell if wish to avoid paying a capital gains tax on any profits.

• Transfer of property

  • Care must also be taken when you transfer property to another entity. So if for example you purchase a property in your own name and decide to transfer this property to a Trust, if this is done within these timelines you could trigger a tax liability on transfer (as a transfer is a deemed sale).

  • It is also important to be aware of issues that can occur when you transfer a property that has been held for a long time. This can bring those properties into the new rules. So again, care needs to be taken with any re-structure and we suggest that you contact us should this be going to take place.

IRD Website Link: https://www.ird.govt.nz/news-updates/brightline-extension.html