The Definitive New Zealand Guide to The Bright-Line Rule for Property Sales

Our guide outlines how and when the Bright-Line Rule applies, alternative property taxes that may still be payable, tax assessment, exceptions, as well as must-know facts and frequently asked questions.

Updated 17 July 2024

Summary

The Bright-Line Property Rule (also known as the "bright-line test") is a law that determines if tax needs to be paid on profits made when a property is sold. It does not apply to properties acquired before 1 October 2015.
Like a capital gains tax, the bright-line rule calculates the difference between what you bought and sold a property for. It then applies an income tax charge on qualifying homes.
The National Government changed the rules, effective 1 July 2024. The bright-line period has been reduced from ten years (or five years for new builds) to two years. This means that properties sold after 1 July 2024 will only be subject to the bright-line rules if they are sold within two years from when your property was purchased.

Our guide covers:

Know This First: Why is it called a 'bright-line' rule? What does 'bright-line' mean?
The name 'bright-line' comes from US law, whereby a 'bright-line rule' is a clearly defined standard that leaves little or no room for varying interpretations. This means that, like income tax and GST, there is no room for inconsistent application, which the government wants as to be fair to everyone.

How Does the Bright-Line Test Apply?

Firstly, the test only applies to residential property and new builds bought and sold within two years of the date of purchase. The test doesn't apply to any commercial property, retirement unit, or similar.
One major exception to the rule is when the property is the owner's "main home". If this is the case, you can buy a home and move to another one within two years; you won't fall under the bright-line rule.
However, if you decide to rent out the home and later sell it within two years, the bright-line tax will be levied proportionally depending on the amount of time it's been rented.
Further to the 'main home' exception, an inherited property is also excluded.

What tax rate is charged?
The profits are taxed at your highest marginal tax rate for your annual income. This means if you earn a salary of $180,000 and make a $200,000 profit from a house sale, you will pay up to 39% tax. This is because the $200,000 is treated as income, so your annual income would be $380,000. Anything income above $180,000 per year is taxed at 39%. So the bright-line tax charged would be:

$200,000 X 39%: $78,000
Total = $78,000 or 39% of the capital gain.

What are the personal income tax rates?

You can find these in our PAYE tax rates guide.

What if I co-own the property? What tax is payable?

If you own the property with your partner and a sale falls under the bright-line rule, you will still need to pay tax. How much depends on the percentage of the property you own, your current income and the total apportioned profits. When you complete an IR833 form after the sale, these figures will be calculated.

Is the bight-line rule a capital gains tax?

Even though the test taxes capital gains as income, it is effectively a capital gains tax in design and enforcement. It may not have the characteristics of a traditional CGT which is often a flat rate and doesn't consider how long an asset for held for, but capital gains drive the bright-line rule. Its origins date back to the government trying to curb the problematic behaviour of property speculators flipping houses week after week while making untaxed income.

Frequently Asked Questions

Why are there a 2-year time limit if there is an exemption for the sale of the main home?

While we can't specifically interpret the lawmakers' intention, generally, we believe that the idea is to reduce the occurrence of people continuously flipping properties, also known as speculators. The 2-year cut-off period is designed to tax those who regularly 'trade' homes - property speculators, developers, professional landlords, etc. But of course, first-home buyers are excluded anyway from any bright-line rule on their family home, regardless of how long they own it for.

How long do New Zealanders own homes for?

Data published in this Stuff.co.nz article suggests the following:

42% of properties are held for five years or less
64% are held for ten years or less
83% are held for 15 years or less
91% are sold within 20 years of being bought

If I buy a home and then move overseas and later sell it within two years, does the bright-line rule cover any profits on the sale?

Yes, but only on the portion of years you didn't live in it. For example, if you bought it and moved in on 1 January 2024, lived there until 31 December 2024 when you moved overseas and sold it on 1 January 2026, two years has passed so there will be no tax to pay.

What happens to parents who help children with a house deposit, co-invest in a property or buy a home outright for their child?

The bright-line rule applies because:

The name of the parents is on the paperwork (either as a co-owner or an outright owner), and
The parents don't live in the house, meaning it's a secondary property

However, unless the home is sold or ownership transferred within two years, there is no tax to pay on the gains. Tax is charged under the bright-line rule if they do either of these things. An exemption applies if your parents live with you in the home and it's their primary residence which you share with them, and you buy it together. You're all sharing the primary home in such a situation, and bright-line testing is not applicable.

To avoid the Bright-Line test, is it better to loan money to a child for a house deposit rather than buy as a co-owner?

There are no tax consequences for parents in such situations as the property is 100% owned by the child as the parents have no ownership rights. However, it's not common banking practice for a mortgage to be approved if the applicant has a significant debt owing elsewhere, for example the parents loaning funds for the property. A loan may make it much harder to get a mortgage offer.

Alternative Property Taxes, Assessment and Exceptions

Can I still be taxed for housing profits if I am outside the bright-line period?

Yes. The IRD makes it clear that tax may still be payable from a property sale when:

You bought the property, and you had a firm intention to sell it.
You have a pattern of buying and selling or building and selling your main home or
A person you're associated with is in the business of property dealing, developing or building, and the property was bought for the business.

The IRD has a decision tool which helps you determine if the property you are buying or selling is taxable.

Are there exceptions to the bright-line test?

The IRD makes it clear that the bright-line property rule does not apply to:

A sale of property that has been your main home, or
Inherited property, or
If you're the executor or administrator of a deceased estate.

How much tax do I need to pay if bright-line applies to me, and how do I pay it?

The first step is to complete an IR833 form, which covers a property sale and calculates how much profit has been made. Once that is known, you'll complete a standard IR3 (income tax) form, which calculates how much tax you owe based on your total earnings for the tax year. The IRD will then arrange collection for this amount.

I'm confused about whether my property sale falls under bright-line or some other tax. Is there a tool I can use to find out?

Yes, the IRD has a decision tool to help you determine if the property you are buying or selling is taxable under any of the property rules.

Related Guides