Bright-line Test Changes | Diprose Miller

If you own an investment property or properties, you need to be aware of the Government’s changes to the ‘bright-line’ test, which took effect on 1 July 2024.

What is the bright-line test?

The bright-line test determines whether tax is payable on any profit made from the sale of a residential property based on the period of ownership.

The bright-line test period is being reduced to two years

The period during which a property sale is subject to the bright-line test has been reduced from 10 years for existing homes, and five years for qualifying new builds to just two years. This means, that as of 1 July 2024, only residential property sold within two years of its purchase date will be subject to tax on any profit made when it’s sold.

The main/family home exemption still applies

The main home exemption remains in place. The bright-line test does not generally apply to the sale of a person’s main home. However, there are some fishhooks to be wary of – depending on your specific circumstances. The exemption applies only if you:

use more than 50% of the property as your main home
use the property as your main home for more than 50% of the time you owned it.

Inherited property rule is unchanged

Current rule stays the same. From the IRD website, “A transfer of residential property on the death of a person to an executor or administrator of a deceased estate, and the subsequent disposal, is not taxable under the bright-line property rule.”

Relationship property settlements

When a couple separate, the bright-line test does not apply to the main home. However, the test will apply to any investment properties (including holiday homes) that are sold within two years of their purchase date, as part of the relationship settlement.

Rollover relief rules extended

The rollover relief rules are being extended to the associated person rules. This includes:

associated companies, or a person and an associated company
relatives (within 2 degrees of relationship)
trusts and settlors, beneficiaries, and related trusts
a partner and a partnership
a look-through company and an owner of that company.

Be aware though, these new rules are limited to situations where the transferor and the transferee are associated for two years before the transfer. Plus – you’ll only be able to claim rollover relief once in any two-year period.

These changes will come into effect on 1 July 2024

Understanding the changes to the bright-line test is essential for making informed investment decisions. It’s particularly important for anyone involved in property development or larger scale property investment. By staying informed and proactive, you can ensure that your investment strategies remain sound and compliant with the latest tax obligations.