The Government's property Bright-line tax reforms were announced earlier this year. The most significant being the doubling of the Bright-line Test effective timeframe from five to ten years. This reform will impact residential properties acquired on or after 27 March 2021, where properties do not qualify for a “main home” exemption i.e., investment properties and holiday homes.
The Bright-line Test
The Bright-line Test now means that income tax is required to be paid at a taxpayer's marginal tax rate on any gains made from a sale of residential property within 10-years of its acquisition, subject to several exemptions. Among other exemptions, The Bright-Line Test does not apply to the residential property if it is the taxpayer's ‘main home’ or if it was acquired by inheritance.
The changes to The Bright-line Test are not as simple as just extending the period to ten years, there are other distinctions around ‘new builds’ and ‘main home’ exemptions.
‘New builds’ will not be immediately impacted by the extension and will remain subject to the original five-year period. This is consistent with the Government’s aim to increase housing demand by giving preferential treatment to ‘new builds’. The Government is yet to define what specifically constitutes a ‘new build’, it has been suggested that it could include properties acquired within a year of a Code of Compliance being issued.
There is a further change to the exemption for ‘main home’ properties acquired after 27 March 2021 and sold within the 10-year Bright-line test period a ‘change of use rule’ has been introduced. If you have not lived in your property as your main home for a period of more than 12 months in during, continuous or not, you will pay tax on the portion of profit that relates to the period that the ‘change of use’ occurred.
It's important to note that time frames for property transactions generally start when a property owner has the title transferred to them and ends when the property owner enters into an agreement to sell the property. A property owner should therefore be aware, that for the purposes of the Bright-line Test the point of acquisition and the point of disposal differ i.e., not from agreement to agreement or from registration of title to transfer of title but from registration of title to entering into an agreement.
There are specific provisions for different situations including where a property is subdivided. And specific rules around Trusts. All Trusts that buy or sell property must have an IRD number, even if the home is the only asset held by the Trust. The sale and purchase of a residential property by a Trust, cannot be completed unless a Trust has an IRD number. If a property owner wants to claim the main home exclusion where the property is in a Trust, there are specific rules that need to be met.
If you are contemplating buying or selling a property, need advice around specific provisions or Trusts, please seek advice from your accountant or lawyer. Seeking advice before a sale and purchase agreement is signed could ultimately help prevent or minimise an unexpected tax bill.
For further information on this subject, please make contact with Steven Stebbings, he will be able to help you.
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