Even so, broader legislative changes have meant people still seek clarification on the rules and how they apply to their circumstances, so let’s look at what they mean for you if you sell your home or rental…

How does the bright-line test apply now?

On 1 July 2024 the bright-line test for selling residential property in New Zealand returned to two years from purchase date (down from five or 10 years). A sale made within that two-year window from purchase may bring a requirement to pay tax on profit, but beyond then your capital gains generally won’t be subject to bright-line tax.

The sweet spot ensuring that most owners won’t have to pay bright-line tax is the main home exclusion but the rules are still somewhat complex. Let’s look at the facts and some scenarios…

Exactly when does the bright-line test start?

It typically begins on the date the property title was transferred to you and ends when you enter a binding sale and purchase agreement to sell that property. There are other rules, such as when the property is gifted or off-the-plan (meaning you’re purchasing it before completion).

How much tax would I have to pay under the bright-line rule?

Under the bright-line rule, property sale profits are added to your annual personal income – assuming that the property is in your name.

Let’s say your salary is $130,000 a year and you make $170,000 in profit from the sale of your house. In this instance, you would be taxed at 33% on the first $40,000 of profit and then at the top personal rate of 39% on the remaining $130,000.

There are different rules if the house is in a trust or under joint ownership. It would pay to talk to your accountant about these.

I own and live in my home. Do I qualify for bright-line exclusion?

Firstly, let’s look at Inland Revenue’s definition of “main home”. You can only have one main home and it’s where you and your immediate family live, your personal property is kept and your social ties are strongest. Inland Revenue also looks at the use of your home and your ties with the surrounding community.

Specifically, the main home exclusion applies if at least half the property has been used as the main home for at least half the period of ownership.

Are there other instances when the bright-line test doesn’t apply?

Other exclusions are if the property is farmland (or capable of being used as farmland) or predominantly (more than 50%) used as business premises. Nor does bright-line tax apply to commercial property or retirement units; or when you’re the executor or administrator of a deceased estate that includes the property, or when you inherited the property from the estate. However, if you dispose of the inherited property within two years of it having been originally purchased by the deceased person, the proceeds will be taxable under the bright-line test (with a deduction for the original cost).

What if my house was under construction during the bright-line period

Construction periods will be ignored when determining whether the land was predominantly used as the main home.

Let’s say someone buys a section and it is vacant for three months, then a house is built there over 13 months before it becomes the owners’ main home for six months. The vacant three months would be compared to the six months of occupation, with the latter more than 50% of the period counted for the test. The main home exclusion would therefore apply, making any gain exempt under the bright-line test.

Does bright-line tax apply if I’ve bought property outside of New Zealand?

New Zealand tax residents who buy and sell overseas residential properties (but don’t live there) still have to pay tax under the bright-line test if they sell the property within two years of purchase for a profit.

What if I sold a property before 1 July 24?

Let’s say you’re filling out your annual tax return in 2025 and need to account for your yearly income. If you sold a property between 01 April 2024 and 01 July 2024, the old bright-line rules will apply, of five years or 10 years depending on when the property was acquired. The exclusions can be viewed here or you can talk to your accountant for more detailed advice.

Does the bright-line test apply if I buy property for my children?

There are potential traps if you buy a house for your children and sell or transfer ownership to them within two years of purchase. Bright-line tax applies if the house is in your name, but you don’t live there. However, you may be able to claim rollover relief…

Can I claim rollover relief?

Rollover relief is available once in any two-year period. It means the bright-line clock isn’t reset after an ownership restructure and the original owners don’t have to pay tax if the bright-line test is not met.

It has been extended to transfers between most people associated for at least two years prior, and to a trustee of a trust where beneficiaries have been associated with the transferer for at least two years. There are exceptions, but the extension should make restructuring family affairs much easier, as well as making it easier for parents to help their children into a home. However, if the parent lets the child live in a home without giving them the property, then it is unlikely that the main home exclusion would apply to that property, because the parents probably already have a main home.

IRD’s bright-line rules refer to “intentions” with the property…

Inland Revenue has stated that having the intention to use a property as your main home is insufficient if you didn’t actually live there.

It also wants to know if you bought the property with the intention or purpose of selling it. This is more likely to apply to property dealers, developers and builders, or those associated with them (if the property was bought for the business), but you could come under scrutiny if you have a history of “regularly” buying/building and selling property. Different taxes may apply in this scenario.

Inland Revenue has a general guidance property tax decision tool, but if you have any more questions or concerns about application of the bright-line test, we are here to help.