Bright-Line Developments

If you own a residential property or have plans to buy one, it’s important to have a basic understanding of the bright-line test (and how it affects you). In March 2021 the bright-line test period was extended to 10 years for property acquired on or after 27 March 2021.

The bright-line test applies only to residential property. If the property is purchased on or after 27 March 2021, and you sell it within 10 years, the bright-line test will apply to the sale and any profit made will be taxable (unless an exemption applies, as highlighted below).

Exemptions:

1. Sale of the main family home

2. Transfer of property to executors of an estate

3. Relationship property transfers (property being transferred after a separation)

The main home exemption can be used if the property was your main home for the entire time it was owned. Where the property is not used as your main for one or more periods of a year or more, while you own it, 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 main home exemption can only be used twice in a 2 year period. This is to prevent an exemption applying for those who have a pattern of buying and selling a main home. New build properties are subject to a 5 year brightline rule. This new build test will not be able to be used if the property is sold as a bare land section, or if you purchased the property more than 12 months after a code of compliance certificate was issued for the property. Any profit from a gain in property value is considered taxable income. It is important to obtain tax advice if you are planning on changing the “use” of your property. For example, if you plan to use your property for something other than your main home for more than 12 months. Moreover, the bright-line test also catches parents who are helping children into their first home and the bank requires a parent to be a co-owner on the title of the property.

If you are unsure whether your property transaction will be caught by bright-line test, or would like more in-depth advice or further information about the content of this article, please get in touch with the team at Pitt & Moore on 03 548 8349, and ask to speak to Oliver Jones-Allen, Solicitor.

Disclaimer: The information contained in this publication is of a general nature and is not intended as legal advice. It is important that you seek legal advice that is specific to your circumstances.