NZ property: bright-line test reinstated

It has been almost a year since the amended bright-line rules came into effect. The purpose of the bright-line rules is to tax any gain on sale where a residential property is acquired and sold within a specified timeframe and is not taxable under any other tax rules.

For residential property sold from 1 July 2024, the bright-line test applies when the property is sold within two years between the bright-line start date and the bright-line end date.  Residential properties sold before 1 July 2024 have a different timeframe.

For most homeowners looking to sell their property, the bright line start date is generally the date when the property’s title is transferred to the new owner (generally on the settlement date), and the bright-line end date is when a binding sale and purchase agreement to sell the property has been entered into.

MAIN HOME EXCLUSION 

A homeowner’s sale of the property is not subject to the bright-line test if it has been predominantly used, within most of the bright-line period, for the purpose of being the homeowner’s main home.  This is also commonly known as the main home exclusion.

To qualify for the main home exclusion, the homeowner must meet the following requirements:

• more than 50% of the property’s area (including the yard, gardens, and garage) must have been used predominantly as the homeowner’s main home; and
• the homeowner must have lived in the property as their main home for more than 50% of the time during the bright-line period.

If either of the requirements are not met, then the main home exclusion may not apply.

LIMITS TO THE MAIN HOME EXCLUSION

The main home exclusion can only be used with respect to one property. If the homeowner sells their main home twice or more within a two-year period or has a regular pattern of buying and selling residential land, then they will not be able to claim the main home exclusion.

The homeowner must also have used the property as their main home and not just intended to. So, if the homeowner’s family member has used the property as their main home, instead of the homeowner, then the main home exclusion will not apply.

A residential property held in trust may also use the main home exclusion if it was the main home of a beneficiary of the trust, and the principal settlor does not have a main home; or it is the main home of the principal settlor of the trust that is being sold.

WHAT HAPPENS WHEN A MAIN HOME IS SHARED WITH A FLATMATE OR FLATMATES?

The Inland Revenue has stated that if the homeowner has mainly used the home as their residence and not for any other more significant purposes, then renting the property to a flatmate(s) will not generally affect the eligibility of the main home exclusion.

This is in contrast, for example, if the homeowner uses 40% of the property as their main home with the remaining 60% being rented out as a flat, then the main home exclusion may not apply.

Another factor the Inland Revenue may consider is whether the homeowner has many flatmates living in the property. The Inland Revenue may consider this arrangement being similar in nature to a boarding establishment which may incur different tax rules.

WHAT HAPPENS WHEN THE HOME IS STILL BEING CONSTRUCTED? 

When a new home is being built, the tax rules specify that the construction period can be ignored when determining whether the use of the property qualifies for the main home exclusion.

The Inland Revenue has explained that the construction period is determined when the construction began (including the design phase), to when the construction was completed (with the code compliance certificate issued) and to when the property is eventually sold.

Let’s say for example, Alex and Bianca are new homeowners and purchased a property off the plan in December 2022 with the intention to settle in early January 2024. Due to delays, the construction of the house was not completed until June 2025. Both Alex and Bianaca eventually settled in June 2025 and used the property as their main home. The property was later sold in December 2026.

The construction period between December 2022 to June 2025 (being 30 months) is ignored. The period for the main home exclusion only applies to the period between June 2025 to December 2026 (being 18 months) when determining whether Alex and Bianca qualify for the main home exclusion.

HOW DOES THE BRIGHT-LINE TEST RELATE TO A CHANGE OF PURPOSE OR INTENTION BETWEEN CONTRACT AND SETTLEMENT?

One important thing to note is that the bright-line test and main home exclusion rules do not apply if any other tax rules apply that relates to the acquisition and disposal of land. Commonly, homeowners may be taxed on the sale of the main home if the property was originally acquired for a purpose or with an intention of disposing it (assuming no other exclusion applies).

The Inland Revenue has clarified that the relevant consideration is the homeowner’s purpose or intention at the time of acquiring the land. So, if the homeowner did not have any firm purpose or intention of disposing the home, then it is unlikely that the homeowner will be taxed on the eventual sale.

Let’s say for example, Chris and Daniela enter into a binding sale and purchase agreement on 10 June 2025 to buy a house for $1 million. They plan to move into the house to live in it as their family home. On 24 June 2025, Chris and Daniela were approached by a different family to buy the property for $1.5 million. This unsolicited offer was too good for Chirs and Daniela to turn down.

They accepted the offer by entering into a separate sale and purchase agreement on 26 June 2025. Once their original purchase was settled on 30 June 2025, they lived in the property for a week and settled the sale of the property a week later on 7 June 2025.

In this example, the purchase of the home was to be Chris’s and Daniela’s family home. It did not matter that by 30 June 2025 (when the property was settled) they had changed their intention with a view to dispose of the home.  Their intention is assessed on 10 June 2025 when they had first acquired the property. The income derived in their sale of the property was therefore not considered income.

However, the 2-year bright-line test will apply to Chris and Daneila’s sale of the land as the bright-line end date (26 June 2025) falls within 2-years of their bright-line start date (10 June 2025).

As the instrument to transfer the land to Chris and Daniela under the first agreement was not registered before the bright-line end date, the main home exclusion does not apply to Chris and Daniela because they did not begin living in and using the property as their main home until 30 June 2025.

DEVELOPMENTS

While there have been no landmark challenges to the bright-line tests since the new changes, the Inland Revenue’s updated guidance and legislative amendments have provided greater clarity for taxpayers. These changes aim to reduce ambiguity and ensure that property transactions are taxed appropriately, reflecting the government’s intent to target speculative activities without placing an undue burden on long-term homeowners.

FURTHER INFORMATION

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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.