Last week the IRD sent us a list of clients who had sold or transferred a residential property that may meet the bright-line rules. Profit on those sales may be taxable.

IRD source this information from Land information NZ after property title changes.

Bright-line rules may affect any person disposing of residential property, so a summary of the law is timely.

The rules look at residential properties:

• purchased on or after 1 October 2015 to 28 March 2018 inclusive, and sold within two years, or
• purchased on or after 29 March 2018 and sold within five years.

Generally, the period starts on the date the property’s title change is registered with LINZ and ends on entering into a Sale and Purchase agreement. This is the first trap for the unwary, as the same data type is not used for acquisition and disposal dates.

Residential property includes land with a house on it or which may have a house built on it. For NZ tax residents, this includes property anywhere globally.

Bright-line property rules do not apply:

1. When the property is your main home. You can only have one main home and must have used it as such for more than half the time you have owned it. Home usage must include more than 50% of the property’s area - backyard, gardens, garage etc. g. if 60% of the property is a rental and the remaining 40% your home, this exclusion doesn’t apply. The main home exclusion can only be used twice over any two-year period. For Trusts, this exclusion applies if the property is the main home of a beneficiary or the principal settlor of the Trust.
2. If you inherited the property, but only if the property is sold by the person who inherited it. For example, two brothers (John and Mike) are each left a half share in a residential property. John sells his share to Mike on 12 April 2018, then Mike sells the entire property on 20 November 2020. Mike has sold John’s half share within five years of acquisition, so he may be taxable on 50% of any gain on the sale.
3. To an executor or administrator of a deceased estate.

For example, where parents purchase a property to temporarily hold for a child for say 3 months, while awaiting funds from the sale of the child’s existing home, the bright-line rules would apply. The IRD would probably accept the on-sale to the son at the same value (thus no profit), due to the short period of time. However, if it were, say, three years between purchase and on-sale, the IRD would assign a profit element, even though there is no “cash” profit. Transactions between associated persons are deemed to be at market value, and values would have increased over that period.

Or, if a Trust purchased a section to erect a house for a beneficiary, but then sold the section within five years as the beneficiary moved overseas before the house was built, the profit is taxable.

Any taxable profit is added to the person’s income in their tax return for the year of sale and taxed at their marginal tax rate. Special taxing rules apply to non-residents disposing of NZ residential property.

If you are thinking of selling residential property you’ve owned for less than five years, check with your tax adviser to minimise any tax shocks.