Bright-Line Test Changes: What you need to know
The New 2-Year Bright-Line Test for Residential Property Sales
In case you missed it, one of the biggest changes happening for property owners and investors this year is the update to the Bright-Line Test for residential land. Starting from 1 July 2024, the Bright-Line Test for the sale of "residential land" is undergoing significant changes. The test period is now reduced to two years for residential property transactions.
This update is highly specific in terms of dates and definitions and extends to residential rental properties owned overseas. The Inland Revenue Department (IRD) is focused on residential/bright-line sales.
Understanding the Hierarchy of Tax Rules
It’s crucial to note that you cannot directly apply the bright-line rules to determine if your property sale is taxable. In “order of priority,” the bright-line rules are positioned at the bottom, behind other pre-existing sections of the Income Tax Act that pertain to land sales. This means other sections might apply before the bright-line test does.
Key Scenarios Where You Might Be Taxed
You might be liable under other sections of the tax law if:
You purchased a property with the intention of resale.
You have a pattern of buying and selling properties (even if it includes your family home).
You are involved in property development, building, subdividing, or if the land has been rezoned.
You are associated with a builder, property developer, or subdivider of land.
Exemptions and Rollover Provisions
There are exemptions within the tax legislation, and changes to exemptions and rollover provisions for residential property will take effect from 1 July 2024. Rollover provisions apply when you transfer ownership of residential land internally, such as moving the ownership from you to your trust.
Personalised Advice Is Essential
Given the complexity of the legislation and the uniqueness of each situation, we recommend you consult with us before making any decisions regarding land or property transactions. We are here to help you navigate these changes and provide tailored tax advice to ensure there are no surprises and that you have a solid plan in place.
Claiming Interest on Rentals
Additionally, there are changes to interest deductibility rules for residential rentals:
For the year to 31 March 2024, 50% of the interest is deductible for existing residential rentals (there are some exceptions).
From 1 April 2024, 80% of the interest can be claimed.
From 1 April 2025, 100% of the interest can be claimed.
New builds are exempt and will continue to enjoy 100% interest deductibility.
Residential rental losses remain ring-fenced.
Contact Us for Expert Guidance
If you are contemplating a property transaction, please get in touch with us. We will provide the right tax advice tailored to your specific situation, ensuring you are well-prepared and informed ahead of time.