The bright line test was first introduced on the 1st of October 2015 requiring tax to be paid on any gains made from the sale of residential property within 2 years of purchase. That was extended to 5 years with effect from 29th March 2018. Tax would not have to be paid if property was transferred upon the death of the owner, acquired by inheritance, transferred through a relationship property agreement, or used as the owner’s main residence for the majority of the time it was owned (the family home exemption).
On the 27th of March 2021, the bright line test was further extended so that any gain on residential property sold within 10 years of purchase is taxable. New builds are only subject to a bright line test of 5 years.
Exemptions are currently in place if:
- The property was transferred upon death of the owner
- The property was transferred through a relationship property agreement
- The property was used as a family home for the entire time it was owned
Change of use rules to do with the family home exemption changed at the same time. The test for properties acquired after 27th of March 2021 operates on the proportionate time the family home is the main residence of the owner. The remaining proportion is taxable. If the property changes to and from a main residence to a rental property, the period of time the property was a rental property will have tax deducted from the gains made. For example, if a property is bought in 2022 for $800,000 and used as a family home for 5 years then changed to a rental property for 2 years and sold in 2027 for $1.1 million, 2/7ths of the $300,000 income from sale will be taxable. If a property is rented out for a period of time as short stay accommodation, this is considered a rental property and is not exempt for business purposes.
Because the date of acquisition of property is so important for which bright line test applies, the legislation defines the date a property is acquired as on the date a binding sale and purchase agreement is entered into, even where it is conditional. Therefore, in summary, if you entered into your S&P agreement for a property before 29 March 2018, effectively, no bright line test now applies. If you entered your S & P agreement between 29 March 2018 and 27 March 2021, the 5-year bright line test applies. If a property was acquired on or after 27 March 2021, and was not a new build, the 10-year bright line test applies.
Some family homes are owned by family trusts rather than personally. The residential home exemption extends to family trusts where the main home is the main home of a beneficiary in the trust and the family trust’s “principal settlor” does not have a main home or it is the main home of the principal settlor of the trust that is being sold. The principal settlor is the person who has made the biggest financial contribution to the trust. There are technicalities and other limitations. If the family trust is the home owner or has a share in the home, you need to get professional advice before you look to sell. Otherwise the consequences could be costly.
A related situation is that some families have a family trust is controlled by one parties’ parents and they decide, through their trust, to assist their child to acquire a home in shares with that child and perhaps that child’s partner or spouse. This is quite common, particularly when this family help is a significant part of the ingoing equity. That worked perfectly well before the bright line test. For houses so purchased after the 29th March 2018, that no longer works well, because the share belonging to the child and partner is their family home and exempt, but the share owned by the parent’s family trust (assuming the parents have their own home) does not have that exemption. Therefore, if the child and partner think they might wish to change homes within the bright line period, the trust will need to assist in a different manner, say by advancing the money to the child, but on condition that the child and their partner sign a contracting out agreement under the Property (Relationships) Act to make that “family money/family share”, remain the separate property of their child. In that way, the brightline test is avoided because the Trust never becomes an owner of the property and the contributing family trust contribution will be protected from becoming relationship property should the child’s relationship fail.