Property Taxation Changes for Your Residential Property (Bright Line Test)

If you, your Family Trust or your Company plan to purchase, sell or transfer a residential property on or after 1 October 2015 then you need to be aware of the new requirements for the taxation of residential property transactions (“the Bright Line Test”).

By way of summary profit, or what is sometimes called capital gain, from the sale of residential property purchased after 1 October 2015 (except for the family home of the seller) and where the property has been held for less than two years, will be taxable. The profit is simply the difference between the purchase price and the sale price, after deducting expenses including legal fees, real estate fees and capital improvements. The profit is treated as ordinary income and taxed at the seller’s marginal income tax rate.

As is already the case, profit made on the sale of a property held for more than two years will be subject to income tax if the property was acquired with the “intention” of on-selling it for a profit.

Sellers will not be taxed on any profit made if the property is their family home (this exemption does not apply if the seller is an “offshore person”, is acting as a trustee or has used this exemption at least twice in the proceeding two years). There are other limited taxation exemptions to the “Bright Line Test” which we can discuss with you.

If a seller decides that the property is the family home but knowingly provides false or misleading tax information, this is an offence and can result in a fine, if convicted, of up to $25,000.00 for a first offence or $50,000.00 for a repeat offence.

Tax information will need to be obtained by way of a signed “tax statement” at the time of registration with Land Information New Zealand, when a property is bought, sold or transferred. The general rule is that property buyers/sellers must provide their IRD number and other details (unless a reporting exemption applies). Additional requirements apply to “offshore persons”. This information is passed on to Inland Revenue.

There are some practical consequences and these can be summarised as follows;

  1. There will be additional cost including compliance and legal costs.
  2. A number of passive trusts without an IRD number will now need one – obtaining an IRD number takes time.
  3. There is a possibility of late settlement and default interest if an IRD number has not been obtained in a timely manner.
  4. A purchasers proposed nomination of an alternative purchasing entity can no longer be last minute, due to tax information time frames.

This update is a brief summary of the taxation changes for residential property transactions. We would encourage you to talk to us if you have any questions regarding the implications of these tax changes as they relate to your own personal situation. We welcome any enquiries addressed to our team of solicitors and legal executives.