You own property, maybe investment property or property you use for business and personal use. You’ve heard of bright-line tax and you know the criteria has changed, but what does this mean to you – are you affected? We explain this tax and the changes, below.
The bright-line tax (also known as the “bright-line test”) is tax you pay on any gains made when a property is sold. Whether the tax applies to you or not, depends on how long you have owned property in New Zealand. In 2021, the government extended the bright-line test timeframe from five to ten years which impacts properties acquired on or after 27 March 2021. The bright-line test does not apply for properties acquired before 1 October 2015.
There are some exemptions such as when selling the family home or when inheriting property.
The amount of bright-line tax you pay, depends on both how long you’ve owned the property and how much you earn.
The amount of time the bright-line tax applies is correlated with the length of time you’ve owned the property.
If your property was acquired/purchased:
The bright-line tax only taxes the increase or gain you make when you sell the property. For example if you bought the property for $500,000 and it sells for $600,000, you’ll only pay tax on the increase/gain of $100,000. The gains you make on the sale of the property, are taxed at the same tax rates as you pay for income tax so the tax rate you pay depends on how much you earn.
For example, if you earn $180,000 and make a $200,000 gain/profit on the sale of the property, you’ll pay tax of 39% on the $200,000 gain (as any income over $180,000 is taxed at 39%).
Tax on $200,000 X 39%: $78,000
Total tax: $78,000
However, if you fall in multiple tax brackets, you’ll pay differing amounts of tax on the amounts.
For example, if you earn $100,000 and make a $100,000 gain/profit on the sale of the property, you’ll pay tax of 33% on the first $80,000 and 39% on the remaining $20,000.
Tax on $80,000 X 33%: $26,400
Tax on $20,000 X 39%: $7,800
Total tax: $34,200
There are exemptions to the bright-line test. The bright-line tax does not apply to the family home, property that you inherit, business premises or farmland (so long as you meet the criteria). If you used your property as your main home 100% of the time during the bright-line period, the main home exclusion should apply. When you sell, you won’t pay bright-line tax on any gains made.
A transfer of your main family home may continue to be exempt in certain circumstances. However, ‘change-of use’ rules have been introduced. This means that gains on a sale may be taxed if you haven’t used the property as your home for the entire time.
We know that this tax can be confusing. If you’re unsure whether your property or properties are subject to the bright-line test, get in touch with us.
