New Zealand tax residents selling residential property (including overseas property) that they have owned for less than 5 years may be subject to income tax. To determine whether you will have to pay income tax, you will need to use the bright-line rule.
The bright-line rule only applies to property bought on or after 1 October 2015.
The rule considers whether the property was either:
- purchased between 1 October 2015 to 28 March 2018 and sold within 2 years, or
- purchased on or after 29 March 2018 and sold within 5 years.
This means that if the residential property was bought between 1 October 2015 and 28 March 2018 and then sold within 2 years of purchase, income tax was applied to the capital gains made on the resale. Residential property purchased on or after 29 March 2018 will be subject to the five year bright-line rule. In this case, properties that are resold within 5 years of their purchase will be subject to income tax.
Residential property that is sold outside the bright-line period is not subject to the bright-line rule. This means it will not apply if you purchased a property any time on or after 29 March 2018 and sell it after 5 years has already passed.
There are situations where the bright-line rule does not apply even if you sell the property within the bright-line period.
Main home exclusion
The main home exclusion can be used under the bright-line property rule if the following apply:
- The property was used as your main home for over 50% of the time you have owned it.
- More than 50% of the property’s area was used by you. This could include your backyard, garden, and garage.
Individuals can only have one main residence. The main home exclusion can only be used twice over any two-year period.
A main home held in a trust
Residential properties that are held in a trust can also use the main home exclusion if the property sold was the main home of a beneficiary of the trust or the principal settlor of the trust, unless the principal settlor did not have a main home.
Property that is inherited is not subject to the bright-line test when it is sold by the person who inherited the property. If the property, or any part of the property is acquired by someone other than the inheritor, it may be subject to the bright-line rule.