IRD has extended the bright-line rule from two years to five years

The bright-line rule was updated on 29 March 2018 without much fanfare but with significant implications for those buying and selling residential land in New Zealand. The changes to the bright-line rule also affect the residential land withholding tax criteria for offshore RLWT persons.

What is the Bright-Line Rule?

The bright-line rule applies to the sale or disposition of any residential land you have purchased or acquired on or after 1 October 2015:

Property purchased or acquired between 1 October 2015 and 28 March 2018.	The two-year bright-line rule applies.
Property purchased or acquired on or after 29 March.	The new five-year bright-line rule applies.

This means that if you sell or dispose of residential property within the bright-line rule periods above, tax will be payable on any gains from the sale or disposition of the property. Losses will be ring-fenced so that they may be used only to offset taxable gains from other land sales.

The existing exemptions to the bright-line rule continue to apply. These exemptions include the limited ‘main home’ exemption, transfers upon death in accordance with the deceased’s will or transfers as part of a relationship property agreement. The ‘main home’ exemption can be used for properties held in trust in some instances.

Residential Land

The bright-line rule applies to residential land, which means:

1. Land that has a dwelling on it;
2. Land for which the owner has an arrangement that relates to erecting a dwelling;
3. Bare land that may be used for erecting a dwelling under rules in the relevant operative district plan.

Land used predominantly as business premises and land used as farmland is not included in the bright-line rule.

The start dates and end dates for the bright-line rule depend on the type of purchase/acquisition and the type of sale/disposal. Also, be aware that the bright-line test applies to all dispositions of property, including gifting and compulsory acquisition by a local authority.

Will I Be Affected?

If you are interested in further information or advice about the bright-line rule, residential land withholding tax, or if you have any concerns that your next potential sale and/or purchase, please do not hesitate to contact our friendly team.