New Zealand adjusted its bright-line policies for residential properties amid a potential rise in divestments, a move made to counter higher home prices in the foreseeable future.
Home prices in the country would maintain an upward growth trend with a 10.4% increase in 2022, according to The Treasury’s forecast. The annual change in 2021 reached 29%.
The most significant change for bright-line regulations involved properties purchased on or after March 27, 2021. If you purchased a property with an intention to sell it, you may have to comply with a bright-line rule.
What to know: The new bright-line rules for selling residential properties in New Zealand include a longer duration for determining income tax from capital gains.
What Is A Bright-Line Rule?
Bright-line rules consist of clearly defined terms with little to no room for misinterpretation. In other words, these guidelines aim to be as clear as possible.
The new bright-line rules for selling residential properties in New Zealand include a longer duration for determining income tax from capital gains.
Owners used to pay income tax from divestments if they kept the properties for less than two to five years. If you acquired the property after the deadline in 2021, you should own it for more than 10 years to avoid income taxes after a sale.
Under bright-line rules, property acquired after the 2021 deadline would need to be owned for more than 10 years to avoid income taxes after a sale.
Who Is Required To Pay Income Tax On Properties?
The Inland Revenue Department (IRD) defines a property acquisition date immediately after a buyer signs a binding contract.
You only need to remember three dates as of January 2022 to determine your bright-line period:
- 10+ years for acquired properties on or after March 27, 2021
- 5+ years for acquired properties from March 29, 2018 to March 26, 2021
- 2+ years for acquired properties from Oct. 1, 2015 to March 28, 2018
While the rules seem unambiguous, it’s wise to exceed the ownership period by at least 12 months. Keep in mind that New Zealand may still impose the bright-line rules if you:
- Established a pattern of buying and selling, or building and selling properties
- Purchased a residential property with a clear intention of selling it
Non-individual buyers such as couples should also remember that the bright-line rule may apply if one of them works in the real estate industry.
The lines of business include construction, dealership, and property development, according to the IRD. It’s more likely that you’ll pay income taxes when you acquire the property for business purposes.
The lines of business include construction, dealership, and property development, according to the IRD.
What Are The Bright-Line Rule Exclusions?
New Zealand exempts property sellers from the bright-line rule if they sell their primary residences or inherited properties.
You also won’t pay income taxes if you divested the estate of a deceased person, as long as you acted as the administrator or executor.
The IRD divides primary residences into two categories:
- You occupy the property all or most of the time.
- You have the “greatest connection” to a certain residence if you own multiple properties.
Multiple-property owners should choose their main homes based on factors such as being nearest to their place of business or employment. Other factors include:
- Proximity to family or relatives
- Community or social ties
- The property with the most personal possessions
A change-of-use policy for a homeowner only takes effect if they fail to live in the primary property for more than 12 months.
Homeowners must use over half of their prime residences to become eligible for bright-line rule exemption. For example, granny flats within residential properties must cover less than half of the total area.
If you use the main-home exclusion at least twice within two years before selling your primary residence, the bright-line rule would apply as well.
You would still pay income taxes after selling your primary home when you haven’t stayed in it during the required time. For this reason, the IRD advises property owners to remember the bright-line rule’s three listed dates.
A change-of-use policy for a homeowner only takes effect if they fail to live in the primary property for more than 12 months. In this case, you won’t pay the standard income tax rate after a sale.
A pro-rated tax rate, however, would cover your profit during the non-occupancy period. The change-of-use rule generally applies to homeowners who rented out their primary properties.
New Zealand exempts property sellers from the bright-line rule if they sell their primary residences or inherited properties.
How To Avoid Capital Gains: Buy Newly Built Homes
The Ministry of Business, Innovation and Employment recommends new-build properties for a shorter bright-line period (i.e., five years).
In addition, you would likely save money because most homes in the secondary market often need expensive and more frequent maintenance.
If you’re in the process of buying a luxury home in New Zealand as a foreigner, check out this directory to find a top real estate professional.
