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What are the bright-line and investment property tax policy changes?

Earlier in the year the Government announced new policy for residential property including extension of the bright-line test period from 5 to 10 years, and removal of tax deductions on investment property. In this blog we drill down into the key changes and what they might mean for you.

Bright-line extension

The bright-line test period for tax on the disposal of residential land was extended by Government from 5 years to 10 years.

There are some exemptions to the bright-line test, which include:

  • main dwellings
  • transfers under a relationship property agreement
  • disposals by executors/administrators or by beneficiaries of an estate

If you are a property owner of investment property or a holiday home, you need to carefully consider the implications of the new 10-year period when looking to dispose of your residential land. 

Exemption for new builds

The extension of the bright-line test does not apply to new builds, however the Government has not yet confirmed an exact definition for what a new build is. It is likely that the definition of a new build will include properties that are acquired within a year of receiving their code compliance certificate under the Building Act 2004 (but this is yet to be confirmed by Government).

When is a property not the main home?

Any residential property used as the owner’s main home for the entire time they’ve owned it is exempt from the bright-line test.

From 27 March 2021, if the home is not used as the main home for more than 12 months during the applicable bright-line period, the owner has to pay tax on a proportion of the capital gain equal to the proportion of time the property was not being used as the owner's main home.

What about when a couple is separating?

In the case of a couple that is separating or planning to separate, the bright-line rules don’t apply to the main family home but do apply to any investment or holiday home properties.

If the couple has more than one property, and they can agree to take one property each or split all property equally if there are more than two, a transfer takes place under a relationship property agreement. In these cases, the bright-line test does not apply and no tax has to be paid.

However, if property is sold to a third party and the selling parties have owned the property for less than 10 years and it is not the main home, the bright-line test does apply.

Removal of interest deductions

The Government also announced that interest deductions for residential investment property acquired after 27 March 2021 can no longer be made.

For property acquired before 27 March 2021, interest on the home loan is progressively non-tax deductible against rental income from 1 October 2021.

These changes may have an impact on property investors’ cash flow, particularly where the investor has borrowed a high proportion of the property value to purchase the property.

Investors will be required to pay extra cash to cover the tax obligation, resulting in a lack of cash flow to hold the property. Make sure you understand how these changes affect your investments.

Need help?

If you are thinking of buying or selling and need advice on the bright-line test, the Brent Kelly Law team can help. We can also refer you to a property accountant for any tax deductibility concerns you may have. Get in touch for more information.