If you’re buying and selling a property within five years, then you need to watch out for the Brightline Rules.
We’re seeing more and more people falling foul of the Brightline Rules and being caught unaware. With careful checking of dates, it’s easy to steer clear an unexpected tax bill.
What you pay tax on
The Brightline Rules are essentially a Capital Gains Tax. You’re paying tax (at your top personal tax rate—usually 33%) on the profit from the property.
To calculate the profit, we’re taking your sale price and deducting all costs associated with the property. These costs are things like your original purchase cost, renovation costs, real estate agents, and lawyers.
When the dates run from
In general, the five year clock ticks from settlement on purchase, to signing a conditional agreement to sell a property. Unless it’s a new build which have different rules.
Put another way, it runs from the date you get the keys to the property, through to the date you agree to sell the property.
Two years or five?
If the contract to buy a property was entered on/after 1 October 2015, then you’re caught by a two year Brightline period. If however the contract was entered on/after 29 March 2018, then you’re caught by a five year period.
There are traps in this for the unwary. Contracts which were nominated (swapped from one buyer to another) can go from being subject to the five year period (instead of the two year period), or from being outside the Brightline rules entirely to being picked up.
It’s important you get clear, specialist, advice (which we can help with of course) to dot your i’s and cross your t’s.
As with any rule, there are always exceptions. Your main home is exempt from these rules, as long as you’re not moving too often. There’s also exceptions for commercial land.
Note that a holiday home isn’t a main home so is difficult to get the exception for. The same also applies with mixed use properties, such as a flat upstairs with a shop downstairs, or a property which you’ve both lived in and rented out.
Get in touch and we can run you through how the exceptions might apply in your particular situation.
If you do happen to be caught out by the Brightline Rules, be careful with any Student Loans, Working for Families or Child Support. They all get impacted on by your Brightline sale.
Also, if you’ve got a property overseas then watch out—it’s also caught by the Brightline Rules (even though they were only ever introduced to dampen the NZ housing market…).
The list of complicating factors goes on and on. We haven’t even begun to cover gifts, subdivisions, mortgagee sales or compulsory acquisition.
BUT…and it’s a big but…
Don’t think you can get out of paying tax just by holding your property for five years and one day. The tax man has thought of that.
There are a range of other tax rules which could catch these transactions, so it pays to take advice early—after the sale has gone through is often too late. Get in touch with us today for an initial, no obligation chat. We’re happy to help.
The obligatory disclaimer
Law, and tax law in particular is complicated at the best of times. We’ve tried to put this as simply as possible, but as a result we’ve lost some of the detail or nuance of the law. Please make sure you take specific advice from us or your own advisor prior to entering into any transaction.