Understanding New Zealand's Bright-Line Test for Residential Land
The bright-line test, introduced on 1 October 2015, applies to residential land transactions, ensuring that gains from property sales are taxed if the property is sold within a specified timeframe. There are exclusions for farmland, business premises, and the main home.
Bright-Line Periods
- **2 years**: Acquired on or after 1 October 2015
- **5 years**: Acquired on or after 29 March 2018
- **10 years**: Acquired on or after 27 March 2021
- **2 years**: Disposal on or after 1 July 2024 (new rule)
Definition of Residential Land
Residential land includes:
- Land with a dwelling
- Land with arrangements to erect a dwelling
- Bare land that may be used for a dwelling according to district plan rules
Excluded:
- Farmland
- Land used predominantly as business premises
A dwelling refers to any place configured as a residence or abode, including properties used for Airbnb.
Main Home Exclusion
Your main home is the dwelling you primarily reside in and have the greatest connection to. You can only claim this exclusion twice in the preceding two years. The exclusion does not apply to holiday homes. The IRD verifies the main home status through power bills, electoral roll records, and even neighbor testimony. You must occupy the property as your main home for more than 50% of the time.
New "2 Year Test"
The new rule applies if the bright-line end date is within two years of the start date. Typically, the start date is the title transfer date, and the end date is when a contract to sell is signed. For off-the-plan acquisitions, the start date is the date the sale agreement was entered into, not the title transfer date.
Exclusions and Rollover Relief
- Properties used over 50% for business purposes are excluded if the business space is larger than the residential space.
- Regular patterns of acquiring and disposing of residential land are not excluded.
- Rollover relief allows for "internal" ownership transfers without triggering the bright-line test. This applies to inherited land, relationship property settlements, certain trusts, LTC transfers, and company group transfers.
Seek Professional Advice
The tax rules around property disposal are complex. It is crucial to consult your accountant before entering into any property agreements or restructuring to ensure compliance and optimal tax outcomes.