Tax on Residential Property Sales – Bright Line Test Exemptions
Main Home Exemption
A person is entitled to an exemption from the Bright Line Test if they are disposing of their main home. To qualify for this exemption the land must have predominantly been used for most of the time the person owned the land as a dwelling or as a beneficiary of a trust that owned the land.
To be used predominantly as a main home, means that most of the area of the land must have been actually used for the home and not just intended to be used.
If a person has two or more houses that they reside in, the property that is their main home is determined according to which house the person has the greatest connection with. The greatest connection with test takes into account:
- The time the person occupies the dwelling;
- Where the immediate family (if any) live;
- Where their social ties are strongest;
- The person’s use of the dwelling;
- The person’s employment, business interests and economic ties to the area where the dwelling is located;
- Where the person’s personal property is located.
The main home exemption is unavailable to people who are habitual sellers or where the home is owned within a trust and the principal settlor has another main home. A principal settlor of a trust is the person who has provided the most value, in terms of market value, to the trust. This rule is to ensure that people cannot get the main home exemption through the use of a trust.
A person is considered a habitual seller if they:
- Have previously used the main home exclusion twice in the previous two years from the date the property is disposed of;
- Have engaged in a regular pattern of acquiring and disposing of residential land.
The Bright-Line Test provide an exemption for all transfers following a death and exemptions for any disposals by the executor or administrator or subsequent disposals by beneficiaries.
All transfers form the deceased person to the executor or administrator and from the executor or administrator to the beneficiary are treated as a disposal and acquisition of the property at the total cost of the land to the deceased person at the date of transfer (rather than the land’s market value).
Disposals by a beneficiary, executor or administrator of residential land transferred to them on the death of a person are specifically excluded from the bright-line test. However, the disposals may still be subject to tax under the current land sale rules.
CB6A(5) of the Income Tax Act 2007.
Transfers of property under a relationship property agreement are excluded from the bright-line test. However, any subsequent sale of the transferred property will be subject to the bright-line test.
Property transferred to the spouse or partner is treated as being transferred on the same acquisition date that the partner or spouse originally had when purchasing the property. This ensures that no tax liability arises from this relationship property transfer.
However, the person to whom the relationship property has been transferred may be liable under the bright-line test for any subsequent disposal of the property. This will occur if the person receiving the relationship property enters into an agreement to dispose of the property within two years of the original registration of title for the property.