Familiarise yourself with the bright-line test criteria
The bright-line test is a system the IRD uses to determine whether income received from the sale of residential land will be taxed.
This process has undergone changes to become more expensive, meaning it will now apply to more people.
The bright-line test only applies to residential properties bought and sold on or after 1 October 2015. Residential land purchased on 1 October 2015 through to 28 March 2018 sold within two years may have its sale revenue taxed, regardless of intention at the time of the purchase. Properties bought from 29 March 2018 and onward are subject to the bright-line test if sold within five years.
The bright-line period generally starts on the date the property transfer is registered with Land Information New Zealand (LINZ). If the property is in another country, it’s the date the transfer was registered under that country’s laws. In cases where the sale of the property is captured by the bright-line test, the seller can claim deductions (as revenue account property) for all costs incurred in the business of making capital gains.
There are three exclusions to the bright-line test:
- You are selling your family/main home.
- You inherited the property.
- You’re the executor or administrator of a deceased estate.
When property is received 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 five years of its original purchase date, the bright-line test will apply.
Under the bright-line test, if a residential property is sold at a loss, the loss will be “ring-fenced”.
This means the amount counted as a loss will have put restrictions on it, so that it can only be used for a particular purpose. You can then subtract the “ring-fenced” loss from the income you earn on a future property sale and pay less tax. Loss can only be offset against income from a property sale, it cannot be offset from losses against salary, wage or rental income.