Know the bright line test

The last National Government introduced a so-called “bright line test” for people who sold residential property after owning it for only a short time.

They said the property had to be owned for two years or the profit would be taxable. The last Labour Government increased this to five years, and increased it again – to 10 years – for properties bought on or after 27 March 2021.

Some people will have put in tenders before this magical date and have no right to withdraw them. If the tender is successful the five-year rule applies.

What if you rent your home?

Two lots of rules apply. If the five-year bright line test applies, you look at the percentage of the time the house was used as a main home. If it’s more than 50 percent, no problem. If the new 10-year bright line test applies, you get caught under the bright line test only if you have not lived in your house for more than 12 months, continuously. So if you decide to have an extended period overseas and rent your home, you might need to consider the tax implications.

The new rule is not an “all or nothing” like the old rule. Under the new rule if there is a 12 month period when the home isn’t used by the owner an apportionment is required.

However, provided you own the house for more than the 10-year period, you don’t have any problems because the bright line test will not apply.