Are you thinking of buying or selling a rental property?
It pays to be aware of the bright-line test, which applies to properties purchased after 1 October 2015.
If you buy and sell a residential property, you may have to pay tax on the gain you’ve made.
- Properties purchased on or after 1 October 2015 through to 28 March 2018, are subject to the bright-line rule if they were sold within 2 years.
- Properties purchased between 29 March 2018 and 26 March 2021 are subject to the five-year period.
- Properties purchased on or after 27 March 2021 are subject to ten-year brightline period.
- New builds will have a shortened bright-line test period of five-years instead of ten-years.
The bright-line rule only applies to residential property.
When does the bright-line period start?
The date of the registration of the transfer of title (usually the settlement date).
When does the bright-line period end?
Generally, the end date for the bright-line period is the date you enter into an agreement to dispose of the property. This is usually the date of the sale and purchase agreement.
Main home exclusion
If you buy and sell your main home, the brightline rule will not apply. It’s an exclusion to the bright-line rule.
If the property has been your main home for more than 50% of the time you have owned it, it will also fall into the main home exclusion, however you can only have one main home at a time.
Note: you can only use the main home exclusion twice over any two-year period, immediately before you sold your main home.
If the property is owned under a trust this can in some instances impact the ability to use the main home exemption.
If you are an offshore person and the sale of your property is captured by the bright-line rule, your lawyer or conveyancing agent is required to withhold RLWT (Resident Land Withholding Tax) and pay this to Inland Revenue. Depending on the ownership structure, the RLWT rate is the lesser of 33% (Company ownership structure = 28%) of the gain, or 10% of the gross sale price. If the RLWT is more than your usual tax rate, you will receive a refund of any overpayment when you file your tax return.
You won’t be taxed on any gains you have made in relation to selling a property within the 2, 5 or 10 year period which you have directly inherited or had transferred to you under a will.
Overall, if the IRD classify you as buying and selling property with the intent of deriving income, the gain you derive will be deemed income which is included and taxed in your tax return.
As always, our advice is to check with your accountant or contact us to discuss your specific situation.
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