The National government recently announced changes to the Bright-line test, reducing the timeframe back to two years. These updates will have a significant impact on both home sellers and buyers. In this blog, we will explore the details of the new Bright-line test rules and discuss their effects on the real estate landscape in New Zealand.
Recent Changes to the Bright-line Test
The Bright-line test, a tax measure originally introduced by the National government in 2015, plays a pivotal role in the taxation of capital gains from the sale of residential properties. It was designed to discourage speculative property investments by taxing profits made from selling residential property within a short period.
Over the years, the bright-line timeframe has been adjusted. In 2018, the Labour government extended it from two to five years to promote longer-term investments in the housing market. Then, in 2021, the period was further extended to ten years for residential properties acquired on or after March 27, 2021. Recently, the policy has been revised again, reducing the Bright-line period back to two years for properties sold on or after July 1, 2024. This change aims to balance the market dynamics and provide more flexibility for property owners.
Implications for Sellers
- With the revision of the Bright-line test to two years, people looking to sell their property will still need to be mindful of their tax obligations to ensure they meet the two-year requirement to avoid capital gains tax.
- Sellers who were holding properties for longer periods to avoid the bright-line tax might now consider selling sooner, increasing the supply of properties on the market.
- Property owners might time their sales to align with the two years, leading to more strategic decision-making around selling timelines.
- The change could lead to more frequent market fluctuations, as the two-year threshold becomes a significant factor in the timing of property transactions.
Implications for Buyers
- With the bright-line test period reduced, buyers may be more inclined to purchase property knowing that they can sell after two years without incurring additional tax, potentially increasing market activity.
- This change may lead to the potential for higher property prices. Increased demand from buyers looking to take advantage of the shorter bright-line period could drive property prices higher.
- In terms of investment opportunities, the reduction provides a more attractive proposition for property investors, as they can potentially realise capital gains tax-free after just two years. The change might encourage speculative buying, where buyers purchase properties intending to sell them after the two-year period to capitalise on tax-free gains.
Exceptions
There are some exceptions to the Bright-line test rules. Certain “residential” land is excluded, including:
- Selling your main home: The property you primarily reside in.
- Business Premises: Land predominantly used for business purposes, typically requiring a building from which the business operates.
- Farmland: Land used in a farming or agricultural business, capable of such use due to its area and nature.
Summary
The reduction of the bright-line test period is likely to stimulate the property market, encouraging both buyers and sellers to engage more actively. However, it may also introduce more volatility and speculative behaviour as individuals and investors look to capitalise on the shorter tax-free period. This change could lead to a more dynamic property market but also necessitates careful planning and consideration by both buyers and sellers to maximise their benefits and avoid potential pitfalls.
At East Realty, we are committed to keeping you informed about important legislative changes that can impact your property decisions. If you have any questions or need assistance navigating these changes, please don’t hesitate to contact us.
