Taxes: Capital Gains
and the Bright-line Test
Before selling a property as a property investor, it is crucial to take into account the implications of both the Capital Gains Tax and the Bright-Line test. These taxes can have an impact on the profitability of the investment.
What is a Capital Gains tax?
Capital Gains Tax (CGT) is a tax on the profit made from selling an asset, such as a property, that has increased in value since it was purchased. In New Zealand, there is currently no comprehensive CGT regime, but residential rental properties bought and sold within five years may be subject to income tax on the gains made from the sale which is referred to as the “Bright-line Rule”.
The Bright-line Rule
If you sell a residential property you have owned for less than 10 years you may have to pay income tax on any gain on the sale, unless an exclusion applies. This is the bright-line property rule and it also applies to New Zealand tax residents who buy overseas residential properties.
The bright-line property rule does not apply to properties acquired before 1 October 2015.
The Bright-Line Property Rule:
The bright-line property rule looks at whether the property was acquired:
- on or after 27 March 2021 and sold within the 5-year bright-line period for qualifying new builds or within the 10-year bright-line period for all other properties
- between 29 March 2018 and 26 March 2021 and sold within the 5-year bright-line period
- between 1 October 2015 and 28 March 2018 and sold within the 2-year bright-line period.
DISCLAIMER:
It is important to note that there are some exceptions to the Bright-Line test, such as if the property is the seller's main home, inherited, or transferred as part of a relationship property settlement.
Before selling a property, it is important to seek professional advice from a tax accountant or lawyer to ensure you understand the tax implications and requirements. This will help you to make informed decisions and avoid any unexpected tax liabilities.
Source IRD Bright-line Property Rule
NEW HOMES:
- Bright-line Test:
5 Years Interest - Deductibility:
Yes – for 20 years. Mortgage interest is a
fully tax-deductible expense for New Builds - LVR (Loan to Value Ratio):
RBNZ restrictions DO NOT apply.
Banks/Lenders may lend up to 80%.
EXISTING HOMES:
- Bright-line Test:
10 Years Interest - Deductibility:
The ability to deduct the mortgage interest
as an expense is being phased out, meaning
an increased tax bill - LVR (Loan to Value Ratio):
RBNZ restrictions apply. Banks/Lenders
may lend up to 60% only.
There are exceptions
to the Bright-line Test
- The seller’s main home isn’t tested or taxed.
- Some inherited property is not taxed.
- Most importantly, the Bright-line Rule expires after only five years for a new build (or buying off-the-plan). An existing second-hand property expires after ten years, if it's not the home you live in.
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