After 27 March 2021, if you sell a residential property within 10 years of purchasing it, any increase in value will be taxable income.
There are some exemptions such as the main home, if the property is transferred to you under a relationship property agreement, or if the property was acquired through an inheritance. These exemptions will depend on the specific facts of your situation.
There is also an exception to the 10-year extension for new builds which will continue to be subject to the 5-year period. There is limited detail on what qualifies for a new build, although it appears it will include properties that are acquired within a year of the Code Compliance Certificate being issued.
The bright line test only applies to residential land (this includes bare land) and does not apply to commercial, farmland or property developers.
For example, John buys a holiday home for $800k on 28 March 2021. He decides to sell the property in September 2027 for personal reasons for $1m. No exemptions apply to John. He has a $200k bright line gain because he has sold the property within 10 years. The $200k will be taxed at his marginal tax rate (combined with any other income he receives such as employment or self-employment income).
There are specific details if you have entered an unconditional contract prior to the new 10 year start date 27th March 2021. Please contact us if this applies to you.
Property already owned
If a residential property was acquired prior to 29 March 2018 the bright line test will not apply (because it was either acquired prior to the bright line, or the two year bright line test has expired).
If a residential property was acquired after 29 March 2018, but before 27 March 2021, the five-year bright line test still applies.
We always recommend we review share transfers. There are a lot of catches and a share transfer can have serious tax implications. For example, if dated 27/3/21 or after, then properties owned by LTC could be subject to new 10 year bright line or trigger a bright line taxable event if within an existing 5 year period.
The government has also announced changes regarding interest deductibility. Read further here.
Contact Tim Doyle or Jane Evans today to discuss your business continuity planning needs (or any other matter) on 07 823 4980 or email us. Our office is in Cambridge, NZ, but distance is no problem. We have many international and national clients.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.