What is the bright-line tax and does it apply to my property?

The bright-line tax (also known as the “bright-line test”) is tax you pay on any gains made when a property is sold. If you sell a residential property you have owned in New Zealand for less than 10 years, you may have to pay bright-line tax on any gains made. The tax does not apply for properties acquired before 1 October 2015.

There are some exemptions such as when selling the family home, or inherited property.

While not exempt from the bright-line tax, any ‘New Builds’ purchased after March 2021 still only have a 5-year bright-line period.

If you acquired a property on or after 27 March 2021, and dispose of it within 10 years, the bright-line rules will apply to the sale of that property, and any gains you made will be taxable unless an exemption applies. If you acquired a property before this date, the bright-line rules may still apply, but they are slightly different.

Bright-line rules

If your property was acquired:

· on or after 27 March 2021 and sold within 10 years (or 5 years for a new build), you will pay bright-line tax on any gains made.

· Between 29 March 2018 and 26 March 2021 and sold within 5 years, you will pay bright-line tax on any gains made.

· Between 1 October 2015 and 28 March 2018 and sold within 2 years, you will pay bright-line tax on any gains made.

· Before 1 October 2015, the bright-line tax doesn’t apply and you won’t pay any tax on the gains made.

Bright-line Tax Rate

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

Exemptions

The bright-line test doesn’t apply to the family home, inherited property, 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.

Need tailored bright-line tax advice?

We're experts when it comes to tax compliance, so if you’re unsure if the bright-line tax will apply to your property, or how it will apply to your property, get in touch and we'll help you navigate it.

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