The current government have as part of their election promise extended the the Brightline Test from two years to five years. The bright-line test was introduced in October 2015 and deems profits from the sale of residential property, that was acquired after October 2015 and disposed of within two years, to be taxable income.
The change takes effect on the 28th March 2018 and applies to any residential property purchased after that date, and extends the brightline test from two years to five years. The acquisition date is normally the day title to the land is transferred or commonly referred to as settlement date.
The only exemptions that apply are if the property is,
- your main home
- transferred as part of an inheritance
- transferred to you as an executor/ administrator of a deceased estate.
The rule does not replace any existing rules so even if you sell your property after the Brightline period the rules about buying property with the intention of selling may still apply.
The Brightline test applies to all residential property with the exemptions being farmland and commercial land.
The most common exemption is if the property is your main home.
For the exclusion to apply, the land must have been used predominantly for a dwelling that was the main home. This means that over 50% of the area of the land must have been actually used for the home. In some circumstances, a person will be required to determine the area of land used for their private residential purposes and the area of land used for other purposes. This could be where you run a business from home or part of the property is rented out. The test is based on a person’s actual use of the property and not the person’s intentions.
The land must have been used for your main home for most of the time you owned the land. Inland Revenue has said this to be for more than 50% of the time. The exclusion will not apply when only a family member and not the owner, has used the property as their main home. The exclusion can only apply in full or not at all; it does not apply on a proportionate basis. As a result, if a property is used less than 50% of the time as your main home, the main home exclusion will not apply.
If you live in more than one property, you’ll need to decide which is your main home. To decide if a property you own qualifies as your main home, think about:
- where your personal property is kept
- the amount of time you spend living in each house
- where your immediate family lives
- where your social ties are strongest
- your use of the home
- what other ties (for example: employment, business, economic) you have with the community.
The test is a self-assessed and the permanent place of abode test can offer additional guidance. The test is the home that you are most emotionally attached to in contrast to merely owing a house. The exemption is not an exemption to your first house but is intended to be an exemption to the main family home or dwelling place.
There is a limitation that restricts the main dwelling exemption, to being used only twice in any two year period by any one person.
It is quite possible that some People miss out on the main home exemption inadvertently.
For example, you purchase a residential section, build a house and live in it for a short period before a change of circumstances means that you must sell it.
The question would be, have you lived in the house for more than 50% of the time since purchasing the section. If not, the exemption will not apply and any profit on the sale would be taxable income, even though it was your intention was to keep it and it was not used for any other purpose.
Another example is subdividing a section from off the family home. The dwelling exemption does not apply because the test applies directly to the land that is being disposed of, rather than the overall property.
[Another example is a person purchasing a house and continuing to stay at home with parents for cheaper accommodation and renting the property out. In this case the main dwelling test is a matter of fact. It cannot be your main place of dwelling if it is rented out, even if it was not intended.]
If you are unsure if the Brightline test applies to a property that you are selling or disposing of, talk to a tax advisor, This is because they will be able to help you through the process, and if it does apply they will be able to help you ensure that you are claiming all of the expenses and deductions available.