Bright-line tax rules revisited

It seems like a long time ago that there was a big fuss around the introduction of the bright-line tax rules for residential properties. Since then, most investors have been more concerned about the introduction of the ring-fencing of rental losses. While arguably the real impacts of COVID-19 are yet to be felt in the property market, it is timely to revisit the ins and outs of the bright-line rules in the case that you are considering selling a property for whatever reason.

The rule itself
First and foremost, the bright-line property rules only apply to residential properties bought and sold after 1 October 2015. This rule also applies to New Zealand tax residents who buy overseas residential properties.

There are two bright-line periods:

If the sale of a residential property falls within this period, you will need to pay tax on any resulting profit at your marginal tax rate (subject to any applicable exclusions).

When does the bright-line period start and end?
Generally, the bright-line period starts on the date the property's title is registered with Land Information New Zealand (LINZ) and ends when you enter into a Sale and Purchase agreement.

The bright-line period for properties purchased ‘off the plans’ where the title has not yet been issued, begins when you sign the agreement to purchase the land.

Exclusions
When you sell residential property there are situations when the bight-line property rules do not apply. The main exclusion is if the property was your main home. You can only have one main home and it is the property you have the greatest connection to.

If you use part of your house as a business or it has a rental property attached, using more than 50% of the property's area is important. For example, if you use 40% of a property as your home and rent out 60% as a granny flat, you cannot use the main home exclusion if you sell that property.

It is also important to note that you can only use the main home exclusion twice in any two year period.

What if I sell at a loss?
If you sell a residential property subject to the bright-line rules at a loss, the loss will be ring-fenced against other property income. 

This means you can only claim the loss when you have a future gain on other land sales that are taxable. 

You cannot claim the loss against other types of income such as self-employed income, rental or salary and wages.

Calculation of profit
If you have a property sale that is subject to the bright-line rules, you'll be required to file additional information with your tax return, by way of an IR833. This captures not only the details of the property that was sold, but also allows you to deduct any costs you may not have claimed previously for tax purposes (e.g. capital improvements to the property). This is an important step as it ensures you only pay tax on the actual profit and not the full capital gain. 

Summary
If you're selling a property please consult your accountant or tax advisor for personalised advice. The IRD are very active in tracking bright-line residential property transactions and it's imperative that you know your tax position before signing any Sale and Purchase agreement so you can maximise your sales price.

If you want to know how the bright-line property rules may impact your and your property portfolio, then contact us on 03 474 0475.

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