What is the bright-line property test?

This article was written in April 2021. 

Legislative changes may alter the accuracy of this article. We recommend you take professional tax advice. 

This is a really hot topic on the news at the moment – do you know what it is all about? 

In essence the bright-line property rule means that people who sell a residential property might need to pay income tax on any profit.

Whether it applies to your property and what bright-line period applies if it does, depends on when you acquired the property. In most cases, the date your property is acquired is when the sale and purchase agreement you signed to acquire your property became binding. 

Bright-Line property Rule

The government is doubling the length of time investors have to hold on to additional property to avoid paying tax when they sell, in a bid to cool the market.

Under the bright-line test, people pay their marginal tax rate on capital gains made on the sale of properties, other than the family home, bought or sold within a certain time.

The bright-line property test does not apply to properties acquired before 1 October 2015.
If you sell a residential property you have owned for less than 10 years you may have to pay income tax. This is the bright-line property rule and it also applies to New Zealand tax residents who buy overseas residential properties.

The bright-line property rule looks at whether the property was acquired:

• on or after 27 March 2021, and sold within the 10-year bright-line period
• between 29 March 2018 and 26 March 2021, and sold within the 5-year bright-line period
• between 1 October 2015 and 28 March 2018, and sold within the 2-year bright-line period.

Please note that the government has indicated that new builds will continue to be subject to a 5 year bright-line period. Before this can be legislated, what is considered a ‘new build’ is still to be consulted on.

The Government intends for the legislation to be retrospective so that new builds acquired on or after 27 March 2021 will continue to be subject to a 5-year bright-line period.