When selling residential property in New Zealand, you may be required to pay income tax on any gains if the sale occurs within a specific timeframe. This rule is known as the “brightline test,” which has undergone several changes over the years, with the most recent amendment announced in December 2023 by the National-led government.

What Is the New Brightline Rule?

Starting from 1 July 2024, the brightline test will be reduced from 10 years to 2 years. However, this new legislation has not yet been officially enacted, so the current brightline rules remain in effect until then.

Once the new rule takes effect, any residential property sold after 1 July 2024 will only be subject to the brightline tax if it is sold within 2 years of purchase. This policy will apply retrospectively, impacting all property purchases made within the previous 10-year brightline period.

While the timeframe is the primary change, the following brightline rules will still apply after 1 July 2024.

Brightline Period Start and End Dates

For standard property sales, the brightline period begins on the date of registration of transfer of title, typically the settlement date. The end date is when a person enters into an agreement to dispose of the property, usually the date of signing the sale and purchase agreement.

The brightline test only applies to residential property. Properties used primarily for business purposes or as farmland are exempt from the brightline test.

Different start and end dates apply if you enter into an agreement to on-sell the land before your purchase is registered or if you buy the land as part of a subdivision. Additionally, if you purchase a property with the intention to resell it, you will need to pay tax on any profit made from the sale.

Brightline Exemption for the “Main Home”

If you buy and sell your main home, the brightline test will not apply. However, you can only use the main home exemption twice within any two-year period, depending on when you purchased the property.

Residential properties held in trust can also use the main home exemption under the brightline rule. This applies if the home sold was the main home of the principal settlor of the trust (as long as the principal settlor does not have another main home) or the main home of a trust beneficiary.

Consult with Professionals

Given the complexities of the brightline test and the upcoming changes, it’s essential to consult with your accountant and lawyer before entering into any sale agreement to ensure you’re aware of your tax obligations and any applicable exemptions.