YOU BETTER KNOW THE BRIGHT-LINE RULE!

Updated: 2 days ago




It is paramount that property investors understand the new bright-line property rule.


The bright-line property rule looks at whether the property was acquired:


- on or after 27 March 2021, and sold within the 10-year bright-line period

- between 29 March 2018 and 26 March 2021, and sold within the 5-year bright-line period

- between 1 October 2015 and 28 March 2018, and sold within the 2-year bright-line period.


You will have to pay income tax on any profit you make if you sell a residential rental property that you have owned for less than 10 years. This is known as the bright-line property rule, and the government recently expanded the holding period for residential property, so make sure you know which bright-line term applies to your rental property. Visit ird.govt.nz/property for more clarity about whether the 5 or 10 year time periods relate to your case. The bright-line rule does not apply to your main home, an inherited property, or if you are the executor or administrator of a deceased estate. If you sell you will have to file an income tax return as well as a Property sale information form (IR833) with Inland Revenue at the end of the tax year. Make sure you understand the exclusions to see if they relate to your case. If you have any doubts, we suggest consulting with a tax adviser before selling the house. After that, you will be able to make an educated decision based on any possible income tax costs. In addition to that, the bright-line rule also does not replace current property tax laws so regardless of the bright-line rule you could still be liable for paying income tax on your property earnings. For more information, visit https://ird.govt.nz/propertytax or consult your tax adviser.


And don’t forget about ring-fencing rules for disclosing income tax on rental assets. You cannot offset your residential rental losses (now known as "excess deductions") from your other taxes, such as salary and salaries when filing your annual income tax return. If you have a surplus of deductions, you must ring-fence them and carry them over to the next year when you receive profits from your residential property. You can calculate the deductions on an individual property basis, a portfolio basis if you own several properties. Deductions for one property can however be offset against income from another property in your portfolio, or a combination of the two. We do recommend visiting ird.govt.nz/ring-fencing for more information on residential property deductions.


For people looking to sell their homes, Whanganui Mansions offers a free 8-page report called the ‘14 Golden Rules for Selling Your Home at the Best Possible Price’. The free report can be found at https://whanganuimansions.co.nz

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