Understanding the new bright-line tax changes and what it means for you
The New Zealand housing market has been changing rapidly, and one recent change is the bright-line test. Introduced in 2015, the test was initially designed to protect tenants from housing shortages and rent increases by tightening rules around property investment.
The bright-line test would determine if there were any capital gains triggering the introduction of a tax on those gains. To understand how the bright-line test affects you, it all comes down to when you acquired your property.
The main home exemption remains unchanged. If the property is your primary residence for more than 50% of the ownership period, you won’t be subject to the bright-line tax if you choose to sell.
What it means for investors
The bright-line test can impact your financial planning, especially if you plan to sell within the bright-line period. If you do sell during this timeframe, any profit you make is subject to income tax, which would reduce your overall returns. Knowing these timelines is essential for strategic planning.
With the new law changes, if you have had the property as an investment for over 2 years, you may no longer have to pay tax on any profits made. The shorter bright-line period is expected to attract more buyers to the market due to reduced tax implications for short-term holdings. This change gives buyers more flexibility to react to market changes by selling earlier if necessary or if personal circumstances change.
What it means for buyers
Those landowners who held properties to avoid paying tax may now sell much sooner as they may no longer have to pay tax on their profit from the sale if within the bright-line end date. This will give buyers more options on the market, which will even up supply vs demand. This could temporarily lower property prices, although other economic factors and demand will also play a role.
Sellers may be in a position to reduce asking price knowing they aren’t paying tax on their profit they may have had.
Key changes to the bright-line tax law
1. Reduced Holding Period
For properties purchased after the 1st July 2024, the bright-line test period is now just 2 years for all residential properties, down from 10 years for existing homes and 5 years for new builds. This means that any profit you make from selling a property within a 2-year period, may be subject to taxation.
2. Rollover relief
Rollover relief under the bright-line test allows tax-free transfers of residential property within family groups, preserving the original acquisition date and preventing a reset of the bright-line period, applicable to associated parties, family trusts, look-through companies, partnerships, and Māori authorities for transfers on or after April 1, 2022
3. Main Home Exemption
The main home exemption remains unchanged. If the property is your primary residence for more than 50% of the ownership period, you won’t be subject to the bright-line tax if you choose to sell.
“We are still in a seasonal market, even with the changes of lending and tax. There are typically less homes on the market over this time of year, and by highlighting your property now, it gives you flexibility to get the most out of your situation whilst there is less competition on the market.
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How can we help you?
Navigating the bright-line test may sound complicated, but we’re here to help. While the bright-line test adds complexity to property investments, it is manageable with the right advice and guidance, and getting good sound advice from your accountant is always recommended.
Bayleys Taupo is committed to helping you navigate these changes confidently and effectively by giving you the right advice of when to sell in terms of your position, rather than everyone else’s. We are here to work for you, so you can get the best out of your situation.
Contact us today to learn how we can help you maximize your property investments under these new changes.