The latest changes on 29th March 2018 to the Bright Line Test has changed the test, and as Real Estate Professionals we need to be aware of the impacts this could have on our clients. However like any legislation when it comes to dealing with your clients – always advise them to talk to a professional for clarification, and in the case of Bright Line Tests they need to consult with their accountant.
In October 2015, the IRD introduced a ‘bright line test’ for the sale of residential property.
If you buy and sell a property within a certain “timeframe’ this test is used to determine if you are required to pay tax on the profit.
When legislation was originally introduced the time frame was 2 years, however on 29th March 2018 this was changed to 5 years.
To make this confusing; the 5-year rule only applies to properties purchased after the 29th March 2018. The 2-year rule still applies to properties purchased before this date.
In simple terms, gain is taxable on residential properties that have been held for less than the ‘timeframe’ unless the property can meet one of the exemptions below:
The property was:
- Your main home
- Transferred as part of an inheritance
- Transferred to you as an executor/administrator of a deceased estate.
Note you can only use an exemption twice in 5 years (was 2 years under the old rules)
However, with all IRD legislation, there are many fish hooks that can exist and for that reason we ALWAYS as above strongly recommend clients seek independent advice from their accountant. As salespersons for Black and White Real Estate we do not offer accountancy advice, we leave that for the accountancy Team at Black and White Accounting.
Some of the fishhooks that we are aware of are:
Main Home Exemptions. IRD defines the main home as one the taxpayer has used as their main home for 50% or more of the time that they’ve owned it. Moreover, the taxpayer also needs to use more than 50% of the area of the property as their main home. This means that if you rent part of your house out and the non-rented part is less than 50% of the area in the house. You cannot use that property as your main house under the bright-line test.
If you live between 2 properties, one is able to qualify as your main home.
Subdividing off part of the section. IRD believe that a section does not constitute ‘family home’ as you don’t live in a section, you live in a house, therefore profit made on the sale of part of the section would normally be taxable.
Some exemptions can apply under a matrimonial split.
So at time of listing properties here at Black and White we ask the questions and always advise our clients to seek professional clarification at all times.
Call Mike 0274445373 or Emerald 0278282296 and experience first hand TEAM HARPER