Brightline test in 2024

The Brightline test was introduced in 2015 as a capital gains tax if the property was resold within a two-year period from purchase. It was intended as a method to reduce “flippers” and curb property speculation.

In 2018, the Brightline timeframe was extended to five years (for property purchases made between 29th March 2018 and 26th March 2021). This extension was further prolonged in 2021, imposing a timeframe of ten years for properties bought on or after 27th March 2021 (unless the property is a new build, in which case the Brightline period is five years).

Incoming new Brightline test criteria

As of 1st July 2024, properties sold after this date will only be subject to the rule if owned for less than two years, unless an exception applies (see below). The new Brightline test applies to all properties, so if your property currently has a Brightline period of five or ten years, it will be reduced to two years.

The changes to the Brightline test means properties purchased before July 2022 will no longer be subject to the Brightline test – and the owners can potentially save on average between $55,000 and $65,000 each in tax. This latest update to the parameters of the Brightline test underscore the importance for homeowners to stay informed about the Brightline test criteria and its implications for their property transactions and tax liabilities.

Exemptions to the Brightline test

If one of the below exemptions apply to you, you will not be liable for tax when you sell your property:

1.   Sale of the main family home**

2.   Transfer of the property to an estate executor or administrator

3.   Transfer of the property after the owner dies via sale or part of an inheritance

4.   Transfer following a separation through a relationship property agreement

**2024 Update to main home exclusion exemption

• When the Brightline period extends beyond July 1, 2024, the main home exclusion hinges on the predominant use of the land. If it's used for the main home more than 50% of the time, it's exempt from the Brightline test. Actual usage, not intended, determines eligibility. There's a time component too—over 50% usage as the main home cumulatively.
• The main home exclusion can't be claimed more than twice in two years or if there's a consistent pattern of buying and selling residential land. Construction time isn't factored into the Brightline calculation for properties bought since March 29, 2018. Tax reassessment is available for those who previously paid Brightline tax under the old rules, now deemed non-taxable. 

What is Brightline rollover relief?

Rollover relief was brought in in April 2022, and recognises some transactions change legal ownership without changing the economic owner, so the legal owners adopt the purchase date from the economic owner. These transactions will not trigger the Brightline test. These include:

• A change to the trustees of a trust
• The land has been subdivided
• A change from tenancy in common to joint tenancy and vice versa
• Land transfers for specific family trusts
• Land transfers to Māori authorities / associated with a settlement of a claim under the Treaty of Waitangi
• Changing the Legal vehicle of ownership, for example to a company or partnership
• Note: There have been no changes to the rules with regards to parents helping their children by a property.

**2024 Update to Brightline rollover relief

• Rollover relief is available for transfers between associated persons, provided they have maintained an association for at least two years prior to the transfer. This provision offers relief from immediate tax obligations on the transfer, easing financial burdens for those involved.
• Similar to transfers between associated persons, rollover relief can apply to transfers of property to trusts if the beneficiaries have been associated with the transferor for at least two years before the transfer. This provision aims to facilitate smoother transitions of property ownership within family structures or business entities.
• Rollover relief is also extended to certain transactions involving companies (including look-through companies), partnerships, and transfers between trusts, under specific circumstances. This broader scope provides flexibility for various types of property transactions, encouraging smoother transitions and fostering continuity in property ownership arrangements.

When should I seek legal advice about the Brightline test?

If you own a residential property or are planning to buy a house, either to live in, rent out or hold in trust, it’s crucial you seek legal advice prior to entering into a transaction. The Inland Revenue will automatically be notified once a transfer of a property has been completed. It’s important to have clarity about how the Brightline test NZ affects you to avoid being caught by an unexpected tax bill.

Weston Ward & Lascelles Ltd Christchurch law firm is a multi-disciplinary – Working in arears including Commercial, Wills, Trusts, Estate Planning, PPPR, Leases, Sale and Purchases, Family, Relationship Property, Franchise, Refinancing, Small Business law and a myriad of other areas.  If you would like to discuss your circumstances, call us for a free no-obligation chat on 03 379 1740 or drop us a line by clicking here.