Brightline test explained

By: Greg Douglas

The latest budget has now passed and the government was not able to proceed with capital gains tax as it had no mandate from voters.
This obviously means that there is no capital gains tax on the sale of rental property, unless you are caught under the Brightline test. The Brightline test applies if:

  • The sale amount is paid after July 1, 2016
  • The property is sold in New Zealand and is defined as residential land.
  • The seller has purchased the property on or after October 1, 2015 through to March 28, 2018 inclusive and owned the property for less than two years before selling – or has purchased the property on or after March 29, 2018 and owned the property for less than five years prior to sale.
  • All gains (the sale price of the property less the costs of buying the property) will be taxable and need to be shown as ‘other income’ on your tax return.

There are some exceptions including inherited property and property from a relationship breakup that may effect the treatment of the sale of the property.
If you are deemed an offshore residential land withholding tax person, you will be paying resident land withholding tax if the Brightline test applies to you.
Should you make a loss on the sale of the property, this will be “ring fenced” and only claimable against any future gains from the sale of residential property, excluding the family home.
It is also important that you have the ‘right intent’ when buying a rental property, as otherwise the gain on the sale of the property may be deemed taxable. The right intent, for example, is that you bought the property as an investment with the intention of renting it out for a long time.
It is important to talk to your accounting advisor prior to the purchase or sale of a rental property.
Most people who buy rental properties are looking at holding the investment for a long time, so the above will not affect them.

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