Changes to the Bright-line Rule 2021

If you are buying or selling property, are confused about the recent 2021 bright-line rule changes, unsure of if the bright-line rule applies to you, or would like an overview of the bright-line property rule, the following is a quick guide that breaks down the New Zealand bright-line rules that changed in 2021.

The bright-line property rule

Where applicable, the bright-line property rule treats any financial gain made on the sale of a property as taxable income.

To determine the bright-line period, calculate the period between the date that the property was transferred to you (settlement day), and the date when you enter into a binding sale and purchase agreement to sell the property.

In 2021, the Government made some changes to rules that apply to new builds purchased after 27 March 2021, main home exclusions, and technical transfers of ownerships.

The team at Blackwood Montagna have broken these changes down for you.

Bright-line periods that apply from March 2021:

When the property was acquired
On or after 27 March 2021
Between 29 March 2018 and 26 March 2021 inclusive
Between 1 October 2015 and 28 March 2018 inclusive
After 27 March 2021 (new builds only)

The bright-line period that applies
10 years
5 years
2 years
5 years

The bright-line property rule does not apply to properties acquired before 1 October 2015.

New build bright-line property rule
If you acquire a new build on or after 27 March 2021, then a new 5-year bright-line property rule applies instead of the 10-year bright-line property rule. You must meet the following requirements:

• You must acquire the new build no later than 12 months after it receives its code compliance certificate.
• Your new build must have its code of compliance certificate by the time you sell it.

As a rule of thumb, a property will be considered a new build when a self-contained residence has been added to land, and it has received a code of compliance certificate confirming this on or after 27 March 2020. Aside from the difference in length, the same rules that apply for the 10-year bright-line property rule.

Changes to the main home exclusion

There are some exclusions to the bright-line property rule, and apply where the property is:

- your main home (please see important points below);
- inherited property; and
- deceased estate property for which you're an executor or administrator.

Having intention to use your property as your main home, but not actually using it for that purpose does not allow you to use the main home exclusion.

The above exceptions have nuances which need to be considered before you rely on them – i.e. where you are using less than half the land for your main home, when you sell the property during the bright-line period, the portion of the gain that relates to the rental property would be taxed. The gain that relates to the periods the property is used as a main home will not be taxed under the bright-line property rule. This change applies to all property acquired on or after 27 March 2021 and would apply to both the 5-year new build and 10-year bright-line property rules.

It is important to note that properties rented out for short stays, like Airbnb’s, are also included by the rule, unless they are also the owner’s main home.

Technical changes of ownership

When the legal ownership of a property changes but the effective ownership is the same, the transfer will be ignored (i.e. it won’t trigger the bright-line property rule) if it is in one of the following situations.

- Relief is provided for some transfers to family trusts and for transfers to or from look-through companies and partnerships.
- There is specific relief for transfers of land subject to the Te Ture Whenua Māori Act 1993 and transfers to trusts as part of settling Treaty claims.

This means the original owner will not be taxed on the realised gain on the property, and the new owner will be treated as having acquired the land when it was acquired by the original owner.

Rollover relief is only provided if the amount received on transfer is equal to or less than the original owner’s acquisition cost. No relief will be provided if the amount received is more, but the original owner will be taxed based on that amount if it is different to the market value of the property.

The rollover relief will apply to disposals of residential land occurring on or after 1 April 2022, even if the original date you acquired the property was before the introduction of the bright-line property rule.

Find out more:

This IRD guide book provides a comprehensive breakdown of the bright-line property rules.

Alternatively, you can you the Property Tax Decision Tree calculator that can be found on the IRD website.

How Blackwood Montagna can help

If you have any questions or concerns regarding the bright-line property rule or think you might be selling within the bright-line period, please get in touch with our specialist lawyers to discuss your situation. We also recommend that you seek additional accounting advice. Blackwood Montagna offer a friendly service and can help you to understand where the bright-line rule applies to you, and work alongside your accountant to ensure your tax obligations are met.