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Residential property Ngā whare rīhi me ngā whare haumi

Questions and answers: Bright-line rule

Supporting information on the bright-line property rule

General questions

1. What does "bright-line rule" mean?

A bright-line rule is a clearly defined rule that leaves no room for interpretation.

You can think of it as someone drawing a line in the sand. It’s clear when you cross that line.

The bright-line property rule was updated on 29 March 2018. It says you’ll pay tax when you buy and sell a residential property within five years, unless an exception applies. It’s easy to know if this rule applies in your situation.

All existing property tax rules still apply. So even if the bright-line rule doesn’t apply in your situation, that doesn’t necessarily mean you won’t need to pay tax on your property profits.

2. When does the bright-line rule apply from?

The bright-line rule applies to the sale of any residential property you’ve bought on or after 1 October 2015 as follows:

  • if you bought a residential property 1 October 2015 to 28 March 2018, inclusive: the two- year bright-line rule applies.
  • if you bought a residential property on or after 29 March 2018: the five year bright-line rule applies.

But whenever you buy a property intending to resell it, you’ll need to pay tax on any profit you make when you sell that property.

3. When does the bright-line period start?

Generally the bright-line period starts on the date the property title is officially transferred to you, which is the date the property transfer is registered with Land Information New Zealand (LINZ).

If the property is in another country, the bright-line period starts on the date the transfer was registered under that country’s laws.

Different dates apply if you sell the land before your purchase was registered with LINZ or if you bought the land as a result of a subdivision of property (for example as a sale “off the plan”).

4. What types of property does this rule apply to?

The bright-line rule only applies to residential property.

A property isn’t residential if it’s mainly used for business or as farmland.

That means when you sell farmland or business property, the bright-line rule won’t apply. But you’ll still need to follow existing tax rules. Talk with your tax advisor if you need more information about this.

5. What if I sell my property after the relevant bright-line period has ended for me? Do I have to pay tax?

If you sell a property outside of the relevant bright-line period for you, the bright-line rule won’t apply to your property sale. But the intention test may still apply.

The intention test says you must pay tax on property profits if you originally bought a property with the intention to resell it. The intention test isn’t a new rule. It’s been around for a long time.

6. What happens if I make a loss on a property sale, instead of a profit?

If a residential property that the bright-line rule applies to was sold at a loss (and no exceptions apply), these losses would be “ring-fenced”.

If you owe income tax on another residential property sale in the future, you can subtract these “ring-fenced” property losses from the income you earned on this later sale. That means you’ll pay less tax on the later sale.

7. I know that my student loan repayments / Working for Families Tax Credits / Child Support are calculated based on the income I earn. How will earning extra income, for example from property, impact these?

If your income changes at all during the year, it could impact how much:

  • Working for Families Tax Credits you receive
  • of your student loan you need to repay
  • child support you pay or receive.

Let us know whenever your income changes to make sure you pay or receive the right amount and avoid getting into debt.

8. What if I sell overseas property? Do I have to pay tax in New Zealand?

New Zealand tax residents pay tax in New Zealand on their worldwide income.

If you’re a New Zealand tax resident who earned income selling a property in another country, you may need to pay tax there. You’ll also include it on your New Zealand income tax return and pay any tax.

If this situation applies to you and you need advice to be sure you get you taxes right, please contact your tax advisor.

Find out more about tax residency.

9. Does residential land withholding tax apply to my property sale?

Residential land withholding tax (RLWT) will apply to your property sale if:

  • a sale amount is paid or payable on or after 1 July 2016, and
  • the property sold is in New Zealand and defined as residential land, and
  • the seller:
    • has purchased the property on or after 1 October 2015 through to 28 March 2018 inclusive, and owned the property for less than two years before selling, or
    • has purchased the property on or after 29 March 2018 and owned the property for less than five years before selling, and
    • is an offshore RLWT person.

The definition of an offshore RLWT person is not the same as the definition of offshore person for IRD number applications.

Exceptions to the bright-line rule (aka when the bright-line rule won’t apply to my property sale)

1. What does “main home” mean under the bright-line rule?

You could think of your main home as your “family home”. Your main home is the property you have the greatest connection to.

To be eligible for the main home exception to the bright-line rule, you need to have used a property as your main home for 50% or more of the time that you’ve owned it.

You also need to use more than 50% of the area of the property as your main home. (The area that counts as your main home generally includes things like your yard, gardens and related buildings like the garage.)

This is an important point if you rent out a granny flat attached to your house or part of your house is used as a business. As an example, if you use 40% of a property as your home and 60% as a rental property, you can’t use the main home exception if you sell that property.

If you live in more than one property, you’ll need to decide which is your main home. To decide if a property you own qualifies as your main home, think about:

  • where your personal property is kept
  • the amount of time you spend living in each house
  • where your immediate family lives
  • where your social ties are strongest
  • your use of the home
  • what other ties (for example: employment, business, economic) you have with the community.

2. What’s the main home exception to the bright-line rule?

If you buy and sell your main home, the bright-line rule won’t apply. It’s an exception to the bright-line rule. It means that you generally won’t have to pay tax when you sell your main home.

But you can only use the main home exception twice over any two-year period. You’d have to pay tax on any profit you make from the sale of a third property in two years because you wouldn’t be eligible for the main home exception.

You’re also not eligible for the main home exception if you show a regular pattern of buying and selling residential property.

3. Who decides if the main home exception applies to me?

The person selling a property decides if it’s their main home. You’ll do that based on the criteria listed above.

If you need help figuring out if an exception to the bright-line rule applies to you, talk to your tax advisor.

4. Can I have more than one main home?

No, you can only have one main home.

If you live in more than one house, your main home is the one that you have the greatest connection to. You’ll find the criteria for deciding which property is your main home listed above.

5. My main home is held in trust. Am I eligible for the main home exception if I sell it?

Residential properties held in trust can use the main home exception under the bright-line rule if:

  • the house sold was the main home of the principal settlor of the trust, or the principal settlor didn’t have a main home, and
  • it was the main home of a beneficiary of the trust.

The principal settlor of a trust means the settlor whose settlements to the trust have been greatest by market value. In other words, the principal settlor is the person who has made the biggest financial contribution to the trust.

Talk to your tax advisor if you need advice.

6. What if I inherit a property? Does the bright-line rule apply to me?

The bright-line rule does not apply if you sell a property you inherited.

7. What if I received a property as a part of a relationship break-up? Does the bright-line rule apply to me?

If you receive a property as part of a relationship settlement agreement, you won’t need to pay income tax on the property when it’s transferred to you.

However, if you go on to sell this property within the bright-line period for this property, the relevant bright-line rule will apply.

Income tax filing and paying

1. How and when do I pay the tax I owe on income I’ve made from a property sale?

Before you pay the income tax you owe on your property sale, you’ll need to complete an income tax return.

You’ll generally include the amount of property income you’ve earned in the “other income” box on your return.

You’ll also complete an IR833 Property Sale Information form and submit this along with your income tax return.

Once your income tax return is filed with us, you’ll need to pay your income tax by the due date.

Find out more about filing and payment due dates.

Find out more about individual income tax.

Find out more about business income tax.

2. What happens if I make a mistake on my income tax return?

We know that sometimes people make mistakes. If you get something wrong on your income tax return, we encourage you to let us know as soon as possible so that we can help you get it corrected. We call this making a voluntary disclosure.

Find more information on how to put your tax returns right if you make a mistake.

3. What happens if someone doesn’t include their property profit on their income tax return when they should?

It’s unlikely, but some people may knowingly provide false or misleading tax information to us. That’s against the law. If convicted, it can mean a substantial fine or jail time. It’s just not worth the risk.

More information

For more information about property and tax, check out our web pages on residential property and tax.

If you’d like advice about tax and your property income, please talk with your tax advisor.