As part of our plan to help more Kiwis into homes, we’re extending the bright-line test to 10 years. Here’s a quick explainer on what that actually means, and how it will make a difference for first home buyers.
What is the bright-line test?
The bright-line test is a way to tax the financial gains people make when they buy and sell a house for income. It’s just like paying tax on any other income you might make.
Currently, the bright-line test comes into play if you sell an investment property within five years of buying it. This means if you buy a rental property and then sell four years later, you have to pay income tax on the profit you make.
As part of our plan to level the playing field for first home buyers, we’re extending the bright-line test to 10 years. This means if you sell your investment property within 10 years of buying it, you may have to pay income tax on the profits.
The bright-line test does not apply to your family home or inherited property, or to residential properties used for business or for farmland.
Here’s how it works:
- John buys a house to add to his property portfolio. He rents it out for six years before deciding to sell it. The house is now worth a lot more than he originally paid for it. When he sells it, he will have to pay income tax on the profit he makes from the sale, because it’s within the bright-line period.
- Thomas and Sue buy a house for their daughter to flat in while she’s at university. When she moves out, they rent it out to other students. When they retire 15 years later, they decide to sell the flat. They do not have to pay income tax on the profit they make from the sale, because they are outside of the bright-line period.
- George and Huia buy a house for their growing family. They live in it for five years before moving on to a bigger home. They do not have to pay income tax on the profit they make from the sale, because the bright-line test does not apply to the family home.
How will extending the bright-line test help first home buyers?
Extending the bright-line test to 10 years will dampen demand in property speculation and make things a little easier for first home buyers.
It will also encourage people to invest in new builds, rather than existing housing, because newly built homes are exempt from the changes to the bright-line test. This will help ease the pressure on first home buyers, and will encourage people to build more new homes.
Isn’t this just a capital gains tax?
No, it’s not. A capital gains tax is applied when you sell an asset that’s increased in value over any period of time. This could be anything - shares, artwork, boats, jewellery, and small businesses. We do not have a capital gains tax in New Zealand.
The bright-line test is only applied to residential investment property, like rental homes, bought and sold within a specific time period.
In New Zealand, if a person buys and sells a home with the intention of generating income, the profit – the income – they make is subject to income tax – in the same way wages and salaries are.
However, it can be difficult for Inland Revenue to determine what someone’s intention is when they buy and sell a home. To solve this issue, National introduced the bright-line test. This essentially says if a home is bought and sold within a certain time period, it is likely for the purposes of income, and so profits are subject to income tax. If you sell your property after this time (outside of the bright-line test), you do not have to pay tax on the profits. National’s bright-line test was set at two years.
We’ve extended the bright-line test to 10 years for new investments into existing property to match the current reality of the housing market, so we can capture the speculators this policy was intended to. Long-term investors who own a property for longer than this, won’t be subject to it – which is another reason why this isn’t a capital gains tax. For anyone who already owned investment property, the bright line test stays at five years, and the same for anyone that builds a new investment property.
Wait, so you’re introducing a new tax?
No. This is an existing part of our tax system, and was introduced by National in 2015. We’re extending it from five years to 10 years to level the playing field for first home buyers.
There is no single answer to the housing issues New Zealand faces, but the policies we’re putting in place will make a real difference – and they’re just one part of our ongoing plan to tackle the housing crisis.
This package builds on the work we’ve already done to improve housing in New Zealand, including building a record number of public houses, stopping overseas speculators, reforming the RMA, making tenancy laws fairer, and ensuring rental properties are warm and healthy.
You can read more about everything that we’re doing in housing here.