Recently we are finding more of our clients selling their homes within 5 years of purchasing. Whether this be to upgrade, downgrade or simply take on new opportunities there is one underlying principal that we need to turn our minds to and that is - The Brightline Test.
Exploring the Brightline Test
The Brightline Test is a cornerstone of property transactions in New Zealand, designed to determine whether you'll need to pay tax on the profit you make when selling your property. It's not just another piece of legislation; it has a profound impact on property owners, whether you're a seasoned investor or a first-time buyer it could have an impact you were not expecting.
The key principal when selling is to determine if you are at risk of The Brightline Test applying before you sell.
To assist our clients we look at when they bought, when they are selling and what dates apply to their transaction. The timeframe is always a bit tricky so it is important to get legal advice (and advice from an accountant) before you start discussing this with an agent.
But it is not all doom and gloom and there is one exemption we want to point out that may mean you don't have to worry.
The Main Home exemption in New Zealand Taxation
If you are selling your main home and you do not have a pattern of buying and selling in recent years you may be eligible to claim the main home exclusion. This will be critical for home owners as it will determine whether you have to pay tax or not on your profit.
In a nutshell, if your house has predominantly been your main home, you may be exempt from paying tax when selling it. But here's the twist: if your home doesn't fit this definition or you use it as an investment, the rules change and you may be liable to pay tax on a portion of the profit
When the Main Home Exemption does not apply
If you use your property as an investment or for some reason the main home exemption does not apply then to determine if you are liable for tax we can use time as a guide.
The timeframes are a bit difficult to determine and the below guide is not a hard and fast rule but put simply
If you bought on or after the 27 March 2021 you may be required to pay tax if you sell within 10 years (for existing homes) or within 5 years for new builds
If you bought between 29 March 2018 and 26 March 2021 you may be required to pay tax if you sell within 5 years
If you bought between 1 October 2015 and 28 March 2018 you may be required to pay tax if you sell within 2 years.
Other Scenarios
Recently we have had a series of natural disasters that have resulted in people either not being able to live in their homes for a period of time or having to sell early.
These types of scenarios are not contemplated by the act but they could have a crucial impact on whether or not these people have to pay tax.
For example lets say that you bought your house in 2021 were affected by a flood that meant you lived outside of the home for 3 years and then it was repaired and you decided to sell due to change in circumstances. The question arises would you be liable for the tax on the profit. The fair answer would be no because the person was displaced from their home due to unforeseen circumstances outside of their control - ie they did not choose to not live in the house. But there is a question as to whether there could be tax liability and unfortuantly to date there is no precedent to say what the result will be and the government are acting to to provide some guidance for these types of clients.
In conclusion, whether you're navigating the Brightline Test, exploring New Zealand's property market, or considering the implications of the main home exclusion in taxation, knowledge is your greatest asset. Stay tuned for more insights and updates as they become available around this crucial piece of legislation.
