ARE YOU BEING 'BRIGHT' ABOUT YOUR PROPERTY?

The bright-line test is a rule in the Income Tax Act 2007 aimed at taxing financial gains made on residential investment properties sold within the bright-line period. 

On 23 March 2021, the bright-line period was extended from five years to 10 years. This means that many residential properties – if disposed of within 10 years of acquisition – will be subject to income tax on any profit made. Any property acquired before 27 March 2021, however, will still fall under the previous rules. 

For residential properties acquired between 29 March 2018 and 27 March 2021, a bright-line period of five years applies, with tax potentially being imposed on properties disposed of within five years of acquisition. 

Under the old rules, your property is not subject to the bright-line rules if it has been your main home for more than 50 per cent of the time you owned the property within the bright-line period. Inland Revenue has clarified that a ‘main home’ is where you have lived most of the time. Therefore, you must have actually lived at the property for this exemption to apply. 

For properties acquired after 27 March 2021, the extended bright-line period of 10 years applies. There is still a main home exemption, but the rules for the main home exemption have changed. 

Under the new rules, where the property is not used (while you own it) as your main home for one or more periods of 366 days or more, you will be required to pay tax on a proportion of the increase in the value of the property that matches the proportion of time that you owned the property and (for 366 or more consecutive days) were not living in the home as your main home. 

The Government has also excluded new builds from the most recent law changes meaning that new builds continue to be subject to the old five year bright-line rules.