Taxing Residential Property Sales – What You Need to Know

The Taxation (Bright-line Test for Residential Land) Act 2015 (“the Act”) which taxes residential property acquired and disposed of within 2 and 5 years, and now increased to 10 years has been widely debated.  Whether the Act proves effective in dampening a booming property market remains to be seen.  However, one thing is clear, property owners need to be aware of the legislation and its impact.

Those the legislation aims to target – investors – may be sufficiently familiar with the legislation to avoid its effects.  The not so savvy home owner may unintentionally become subject to its application. This article highlights some of the key issues arising from the operation of the legislation.

The Act applies to the sale of any residential property bought on or after 1 October 2015 as follows:

• If you purchased a residential property between 1 October 2015 to 28 March 2018 inclusive the 2 year bright-line rule applies.

• If you purchased a residential property on or after 29 March 2018 to 26 March 2021, the 5 year bright-line rule applies.

• If you purchased a residential property, except newly built houses, on or after 27 March 2021, the 10 year bright-line rule applies.

The definition of a new build has yet to be defined but it is intended to include properties that are acquired within a year of receiving their code compliance certificate under the Building Act 2004.  The intention is that new builds acquired on or after 27 March 2021 would continue to be subject to a 5 year bright line test.

There are specific rules for property acquired through inheritance and property transferred pursuant to a relationship property agreement.

Generally the time frame starts from when the property owner has title transferred to them and ends when the property owner enters into an agreement to sell the property.  A property owner should therefore be aware that for the purposes of the Act the point of acquisition and the point of disposal differ i.e. not from agreement to agreement or from registration of title to transfer of title but from registration of title to entry into an agreement.

There are specific provisions for different situations including where the property is subdivided, and where the land is sold via mortgagee sale or compulsorily acquired (for example, the land is purchased by the Government for roading).  The latter two are situations in which the property owner is unlikely to have significant control over the timing of the sale and therefore may unwittingly come within the provisions of the legislation.

The legislation relates to residential land.  If the residential property was acquired before 27 March 2021, the main home exclusion will apply if the property has been used as a main home for most of the bright-line period.

For residential properties acquired after 27 March 2021, including new builds, the main home exclusion effectively applies for the period that the property is used as the main home.

There are also specific rules for trusts.  All trusts that buy or sell property must have an IRD number, even if the home is the only asset held by the trust.  The sale and purchase of a residential property by a trust cannot be completed unless a trust has an IRD number.  If a property owner wants to claim the main home exclusion where the property is in a trust, there are specific rules that need to be met and it will be essential to speak to your lawyer or accountant to discuss their application.

Finally, property owners should not forget that in addition to this legislation, there remains existing legislation that taxes property transactions in other situations not covered by the bright-line rule.  For example, the  “intention test” remains so that if a property owner buys a property with the intention of re-sale, the property owner will still be taxed on any profit on that property even if the sale occurred outside the 2, 5 or 10 year period.

For any property owner contemplating buying or selling, advice from your accountant or lawyer before the sale and purchase agreement is signed is essential and could prevent or minimise an unexpected tax bill.

This article is current as at the date of publication and is only intended to provide general comments about the law. Harkness Henry accepts no responsibility for reliance by any person or organisation on the content of the article. Please contact the author of the article if you require specific advice about how the law applies to you.