New Zealand is often said to not have a capital gains tax, however we do have some laws, like the bright-line property rule that act in a very similar manner. The bright-line rule was introduced as a way to tax the profits of residential property investors and speculators if they sell within the test period.

This tax generally doesn’t impact owner-occupied property, however, if you are an investor or considering purchasing a rental property, you should be aware of the impact on your exit strategy. Similarly, if you want to help your children or family by gifting or selling a property cheaply to them, this rule could create a tax implication for you.

This article sets out to provide a high-level guide to the rule, for advice tailored to your situation please talk to your accountant. If you don’t have a regular accountant, Benchmark Mortgages can recommend an expert to help minimise your tax obligations.

How it works

Currently the bright-line test is set at 10 years. Meaning if you purchase a property as a rental or speculative investment and sell it within the 10-year period, you’re likely to have to pay income tax on any gain on the sale.

The test period has changed over the years and across governments, so the rule looks at when the property was acquired:

If the property was acquired on or after 27 March 2021 qualifying new builds are subject to a 5-year test period, and a 10-year test period for all other residential property.

If your investment was purchased between 29 March 2018 and 26 March 2021 it is subject to a 5 year test period.

If you purchased between 1 October 2015 and 28 March 2018, your property was subject to a 2-year test period.

National have announced they will be bringing the bright-line rule back to 2 years by July 2024, meaning that properties acquired before July 2022 will not be subject to the bright-line test at sale.

At a basic level, the tax works by comparing the purchase price of the property and capital improvement costs versus the selling price. For example, if you purchase a rental property for $500k and spend $100k on capital improvements(e.g. a new roof) and then sell the property within the test period for $800k,the IRD would consider a net gain of $200k and charge income tax on this figure. If you gift the property or sell it cheaply, IRD will use market value as the indicator.

There are exceptions and nuances to the rule. For specialized advice on your situation and how you can minimise tax obligations, consult an experienced accountant. To check if your property might be subject to tax, check the IRD property tax tool.

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