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Bright line test now in force! - 9th Apr 2018

Bright line test now in force!

It will likely have passed by many people, however the Bright Line Test has passed through Parliament and received royal accent on 29 March so is now law. This means that anyone with an unconditional sales agreement for a rental property signed after 29 March 2018 will come under the restrictions of the Bright Line Test. If affected properties are sold within five years of being bought, then any increase in value will be treated as income and taxed at the owner’s marginal tax rate.

 While many people think that the Bright Line Test only effects rental property, it can actually affect home owners.

The test was first introduced in 2015 to stop property speculators and traders passing themselves off as rental property providers and not paying their required tax. However now it has been extended to five years, it has become a pseudo Capital gains tax.

It is not just rental property owners who will be effected however. Only an owner’s main residence is excluded from the test, so if they have a second home or a batch, then income tax on these properties will have to be paid on any increase in value if they sell within five years.

Many people also buy "do-up" homes, fix them up then sell them to buy another. Under the previous rules you were allowed to do this twice in two years without any tax being applied. However if you bought and sold a third home it would be subject to the Bright Line Test.

With the new changes, a homeowner who buys and sells three homes within five years will pay tax on their third home. In addition, moving a property into another structure, such as a trust, is deemed to be a sale for the Bright Line Test.

The NZPIF was hoping that a hardship clause could have been included with the new changes. Five years is a long time and many things could happen over this long a period, such as a job loss or an illness.

It is not reasonable that a rental property owner forced to sell their investment when they otherwise would not have wanted to will have to pay income tax on any gain when no other investment would have to.

The key message is that this makes it harder to provide rental property at a time when we need more. In order to counter this increased risk, rental property providers should check their rental prices and ensure they are getting what their properties are worth.

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