Looking to sell your residential property? It’s crucial to understand whether the sale will be impacted by the updated Bright-Line Rules.

What are the Bright-Line property rules?

The Bright-Line property rules (also known as “the Bright-Line Test”) govern whether income tax needs to be paid when that property is sold. The tax applies to any profit made through a residential property increasing in value. Whether tax needs to be paid is dependent on several factors including:

• when the property was purchased (Bright-Line rules only apply to residential properties purchased after 1 October 2015. )

• how long you owned it for

• whether the property was your main home during the time you owned it (designed to tax residential investment property, the Bright-Line rule does generally not apply to your main home, inherited property, or if you're the executor or administrator of a deceased estate.)

The Bright-Line Test - when does it apply?

On 27 March 2021 the Government extended the Bright-Line Rule from 5 to 10 years on residential property purchased on or after that date. This means if it is not your main home and you sell it within 10 years, you will be subject to income tax on the profit from that home increasing in value.

Bright-Line Timeframes for properties purchased before 27 March 2021:

• If you bought a property on or between 29 March 2018 and 26 March 2021, a 5-year Bright-Line period applies

• If you bought a property on or between 1 October 2015 and 28 March 2018, a 2-year Bright-Line period applies.

• Properties purchased before 1 October 2015 have no Bright-Line period.

• New builds will continue to be subject to a 5 year Bright-Line period.

Once the applicable time period has passed, the bright-line rule no longer applies.

A note on sale & purchase dates: The IRD says “the Bright-Line period is generally counted from the date you bought the property which is the date the land is transferred to you (generally the settlement date) and ends when you enter into a binding sale and purchase agreement to sell the property.”

Main homes and the “Change-of-Use” Rule

The Government has also revised criteria around when a property is (or isn’t) the main home with a “change-of-use” rule for properties bought on or after 27 March 2021. If the period when a property is not your main home is 12 months or less, you do not need to count that as a change-of-use - it will still be considered your main home and not be subject to the Bright-Line Test.

If your property is not used as the main home for more than 12 months at a time during the period you’ve owned it, you will be required to pay income tax on a proportion of the profit that relates to the time period/s it wasn’t your main home.

Interest deductibility changes - are you impacted?

From 1 October 2021, the Government also removed the ability to deduct interest for loans used to acquire residential property (unless it is newly built property) on or after 27 March 2021. Interest deductions will still be allowed for property acquired before 27 March 2021, but will be phased-out over 4 income years.

We can help

As with anything relating to tax it can be complex and not always as straightforward as it appears. If you need advice on how the Bright-Line Rules and Interest Deductibility will impact your tax obligations and general finances, please get in touch with our team.