Buying or selling property?
There are property tax rules which apply to the sale and purchase of property which was effective from 1 October 2015. These rules have an effect on all those who buy and sell property including those who have existing family trusts which own property.
While all existing tax rules still apply, the “bright-line property rule” imposes an income tax on any gain from residential land purchased or sold (or otherwise disposed of) unless an exemption applies.
What is the bright-line property rule?
The bright-line property rule means that people who sell a residential property might need to pay income tax on any profit.
Whether it applies to your property and what bright-line period applies, if it does, depends on when you acquired the property. In most cases, the date your property is acquired is when the sale and purchase agreement you signed to acquire your property became binding. The bright-line period starts on the date you bought the property (the date the title was registered in your name with Land Information New Zealand) and ends when you sign a binding sale and purchase agreement to sell the property.
- Acquired before 1 October 2015 – the bright-line property rule does not apply
- Acquired between 1 October 2015 and 28 March 2018 (inclusive) – the bright-line property rule may apply if you sell within the 2-year bright-line period.
- Acquired between 29 March 2018 and 26 March 2021 (inclusive) – the bright-line property rule may apply if you sell within the 5-year bright-line period.
- Acquired on or after 27 March 2021 – the bright-line property rule may apply if you sell it within the 10-year bright-line period.
When the bright-line property rule does not apply.
The bright-line property rule does not apply when:
- The property is your family/main home, and the main home exclusion applies
- You inherited the property
- You are the executor or administrator of a deceased estate.
For those of you with family trusts there is a further twist. A trust may claim the main home exemption but only if the trust owned property is the main home for a beneficiary of the trust and the settlors of the trust do not also personally own a home which the main home exemption has been claimed. The reason for this is pure and simple. It is to stop people using their trusts to claim the main home exemption on more than one property, one in a trust and the other in your own name. Family Trusts also have to comply with all other information required on the tax statements which means that a trust must provide an IRD number on a tax statement signed by the trustees.
We recommend that all of those with family trusts take immediate action to obtain an IRD number for the trust but do so on the basis that you register the trust as ‘non-active’ with the IRD if the trust will not earn a taxable income and does not therefore need to file tax returns.
The bright-line rule does not replace existing property tax rules. You might still need to pay tax on property profits even if the bright-line rules do not apply.
Your main home is the property where you live for most of the time or if you have more than one property, the one you have the greatest connection to. In any case, more than 50% of the property’s area must be used as your main home. If part of your main home is used for other purposes and that uses more than 50% of the property’s area, then the main home exemption will not apply and you will pay tax on any profit when you sell it. E.G., if you use 40% of a property as your main home and 60% is rented out as a granny flat, then you cannot use the main home exemption when you sell.
For further exclusions please refer to the IRD Website https://www.ird.govt.nz/pages/campaigns/brightline
Your obligations
If you sell a property that falls under the bright-line rule, then you will need to complete an income tax return and a Property sale information form IR833 at the end of the tax year.
For advice on hos this may affect you or for assistance with obtaining an IRD number for your trust, please give us a call on (03) 377 4421 or contact us email@ktlaw.co.nz