Bright Line Test increases to five years - What you need to know

On 1 October 2015, the Bright Line Test was introduced by IRD.  This Test required tax to be paid on any profits made from the sale of a residential property where that property was bought and sold within two years, with some exceptions.  The key exceptions to the rule were if the property was used as your main home, the property was transferred upon death, or the property was transferred under a relationship property agreement. 

The enforcement of this rule meant that the frequent transfer of properties by investors with the aim of making monetary gain would now be monitored, and in some cases, taxed.  The Government hoped this would aid the housing crisis by deterring investors from “flipping” houses regularly for a profit.

Under a new Labour-led Government, the Test was extended to five years from 29 March 2018.  The extension means that residential property purchased on or after 29 March 2018 may be taxed on sale if the property is sold within five years.  The same rules and exceptions continue to apply.  Any property that was purchased prior to 29 March 2018 will still be subject to the two year rule.

What you need to know:

• IRD defines the “purchase” date as the date of settlement (i.e. the date your name was registered on the title to the property).
• IRD defines the “sale” date as the date of the written agreement to sell the property.
• Properties purchased between 1 October 2015 and (including) 28 March 2018 will be subject to the two year rule.
• Properties purchased on or after 29 March 2018 will be subject to the five year rule.
• Common exceptions to both rules are:
  • Properties used as your main home (note you can only use this exemption for one property at a time, and this exemption may only be used twice in a five year period).
  • Properties transferred upon the death of the owner.
  • Properties transferred under a relationship property agreement.
• Trusts may receive an exemption at IRD’s discretion.
• Companies cannot receive an exemption.
• Offshore persons cannot receive an exemption.
• IRD calculates the tax amount based on any profits earned on sale, not the overall sale price.

If you are thinking of selling a property that may fall under the Bright Line Test, please contact us before you sign the agreement – we can work together with your accountant to ensure the best outcome for your sale.

Aliesha is a Legal Executive in our Property Team and can be contacted on 07 958 7442.