An extension to the “bright-line” test…

As you will be aware, the "bright-line" test applicable to residential properties has increased from two years to five years.  This increase is effective from (and including) 29 March 2018 and will mean that residential properties bought and sold within a five year timeframe could be subject to taxes.

The new five year “bright-line” period will apply to properties purchased on or after 29 March 2018.

The two year “bright-line” period will apply to properties purchased before 29 March 2018.

It is important to note that a change of entity will re-start the bright-line period.  For example, a transfer to a family trust, or to a company.

There are circumstances when the "bright-line" test may not apply, including the following:

• If the property is the person's main home (if a person has more than one home, the main home is determined according to which one the person has the “greatest connection to”).  An exception to this is if the IRD views a person (or an entity) as having a regular pattern of acquiring and disposing of residential land.  If a person is viewed by IRD as being a “habitual seller”, this could mean that tax is payable on any profit, even if the property is the main home;
• If the property was acquired from a relationship property settlement, there will be roll-over relief for the person who receives the property.  There must however be a formal separation agreement signed in order to be eligible for such roll-over relief; or
• If the property is inherited; there will be roll-over relief for the beneficiary (or beneficiaries) if they subsequently sell the property.

If you are listing a property for sale, we recommend that you check to see when the property was purchased (by obtaining a historical title search), so that you know when your vendor will need to seek further advice about the "bright-line" legislation. 

We of course do not yet know how the REA will view your responsibilities in relation to this legislation but we are sure that you do not want to be the test case put before the REA!