From July, the bright-line test for residential property will only apply if it is sold within two years – our experts explore the main changes and their implications.
Late last year, Finance Minister Nicola Willis announced the Government’s immediate decision to bring the bright-line test for residential property back to two years, effective from 1 July 2024. This removes the effective capital gains tax on investment property introduced by the former Government through its 10-year rule.
Generally, under the current bright-line rules, and subject to exclusions, any profit on the sale of a residential property may be subject to bright-line tax if the property has been owned for less than either five or 10 years. The applicable timeframe depends on when the property was acquired and whether it is classified as a new build.
This change will mean that for properties sold on or after 1 July 2024, the bright-line rule will only apply if the property is sold within two years of acquiring it. These changes will apply irrespective of what bright-line test applied at the time of purchase, meaning that owners who purchased on or before 1 July 2022 will be able to immediately take advantage of the reduced period. The return to a two-year bright-line period will substantially reduce the reach of the rules and simplify things for residential property owners.
This change is particularly helpful for owners who are planning to sell their property if the sale would currently be caught by the five or 10-year bright-line rules. Property owners in this situation may wish to consider waiting to sell until after 1 July 2024, if possible, to take advantage of the reduced bright-line period.
Key aspects of the new legislation enacted on 28 March 2024 include:
- In most cases, the bright-line start date will be the date on which the instrument to transfer the land is registered, and the end date will be the date on which the owner enters into an agreement for the disposal of the land (whether conditional or unconditional);
- All exemptions are generally to be restored to the original 2015 exemptions. A welcome change is that the main home exemption will now ignore periods of construction in determining whether the property was used as a main home for the majority of the bright-line period; and
- Roll-over relief rules are being extended and simplified to apply to all associated persons transfers. However, the associated persons must have been associated for at least two years prior to the date of transfer, and an anti-avoidance test has been added to stop this being abused by only allowing roll-over relief to be applied once in a two-year period.
It is important to consider that for some residential property owners the bright-line changes may not be applicable, particularly where the property sale would be taxable under other land disposal income tax rules. Some examples of when this may be the case could include the division or development of land or property affected by an increase in value due to rezoning.
We’re here to help
If you’re unsure whether the bright-line rules apply to you or if you’re considering selling your property and want to understand the implications, don’t hesitate to get in touch with our team today. We note that we are unable to provide accounting or taxation advice, and recommend you consult your accountant on this aspect.
Author: Paige Sullivan
