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Brightline test

A “brightline test” and the “two year rule” are two terms relating to the tax changes by the government in respect to residential property. So what do they mean and what affect will they have on buyers and sellers of residential property? 

The changes came into place on 1 October 2015 and affect all residential property sales/purchases going forward. 

In a nutshell, prior to 1 October 2015, the position was that tax was only payable on profits on the sale of a residential property if the seller bought it with the sole intention of making capital gains. 

This was a subjective test and was difficult for the IRD to enforce (eg it was easy for individuals to argue that they purchased a property as an investment with a rental return rather than just for making quick capital gains). 

The new rule sets out that tax is payable on all profits if a property is bought and sold within two years. This applies to individuals who own property and also to trusts and companies. 

There are certain exceptions to this rule. For example the family home is exempt. Please note that you can only have one main home at a time. Other exceptions apply if residential property is inherited or acquired under a relationship property agreement.

As a result of these changes lawyers are now required to collect additional information from those who intend to buy or sell residential property. We have to pass this information onto the Land Titles Office prior to settlement of a transaction. This information includes the IRD numbers of those who are buying or selling. This has already created some hiccups as many family trusts that own property do not have IRD numbers and have had to make urgent applications to the IRD to acquire them.

Need help or advice?

If you are wanting further advice around how these changes may impact you we recommend you talk to your lawyer and accountant.