Bright Line Rules - What this means for you

25 Mar 2022
Author: Nadia Holdcroft
 

Bright Line Rules

Are you considering selling or buying a property? You will probably have heard of the Bright-Line Property Rule, but you may not be aware of recent changes to these rules. Before you sell your property, you should ensure that you completely understand whether you are affected by the Bright-Line Rule and what implications they will have on your property. It is also a good idea to understand the rules and how they apply when you purchase a property as well. 

What is Bright Line?

To recap, the Bright-Line Property Rule (when applicable), treats any financial gain made on the sale of a property as taxable income.

The Time-Line

The timing of purchase of the property is all important, as this determines what version of the Bright-Line Rule the property falls under. 

The Bright Line Property rule looks at whether the property was acquired:

  • on or after 27 March 2021 – in this case the Bright-Line Period is 10 years from the date of acquisition;
  • between 29 March 2018 and 26 March 2021 - in this case the Bright-Line Period is 5 years from the date of acquisition; and
  • between 1 October 2015 and 28 March 2018, and sold within the 2-year bright-line period. Properties falling within this Bright-Line Period which have not been sold will not be subject to Bright-Line Tax, with the 2-year period having now passed.

To determine which version of the rule applies to your property, the Bright-Line Test looks at when the property was acquired – usually this is the date that you entered into a binding sale and purchase agreement. This does not matter whether the agreement is conditional (subject to standard conditions such as finance or a building report) or unconditional.

Determining the Bright-Line Period is a separate issue and this is done by calculating the period of time between (usually) the date that the property was transferred to you, known as settlement day, and the date when you enter into a binding sale and purchase agreement to sell the property. 




Exclusions to the rule

There are some important exclusions to the Bright-Line Property Rule, which you may have heard of, and apply where the property is:

  • your main home (although there are important requirements that you need to satisfy to be able to claim this exclusion);
  • inherited property; and
  • deceased estate property for which you're an executor or administrator.

It is very important to note that having the intention to use your property as your main home, but not actually using it for that purpose does not allow you to use the main home exclusion.

The above exceptions have nuances which need to be considered before you rely on them.

New Builds

There is an important carveout under the new version of the Bright-Line Rules for new builds. These have been encouraged by the government and continue to fall within the 5-year bright line period if they are built on or after 27 March 2021, rather than the current 10-year bright line period for other residential properties. 

Change-of-Use Rule

Under the new version of the Bright-Line Property Rule, if you have a property that you’ve lived in as your main home but you have also rented it out for more than a year, you can get taxed on the gain you made while it was rented out, if you sell the property within the Bright-Line Period. 

Properties rented out for short stays, like Airbnb’s, are also included by the rule, unless they are also the owner’s main home. 

How we can help!

If you have any questions or concerns regarding the Bright-Line Property Rule, we recommend that you get in touch with our specialist lawyers to discuss your situation and concerns, and that you also take accounting advice. Getting legal advice early is crucial in ensuring that you know what you are in for when you sell a property, or that you know what you could be in for on a future sale, when you buy a property. 



 
 
 
Bright Line Rules - What this means for you
About the Author
Nadia Holdcroft
Nadia Holdcroft is a member of the Commercial, Property and Private Client team at DTI Lawyers, Hamilton.