Tax on Residential Property Sales – Tax on Sale Within Two Years (Bright Line Test)
Inland Revenue now requires income tax to be paid on any gains from residential property that is disposed of within two years of acquisition. This is known as the bright-line test.
The two year bright-line test period generally starts from the point in time that you acquired the title for the property and ends at the time that you enter into a contract to sell the property.
The bright-line test does not apply to your main home unless you have claimed the ‘main home exemption’ twice in the previous two years. Where you have more than one home, your main home is the home that you have the greatest connection with.
There are some exemptions to the bright-line test such as property acquired through an inheritance or property transferred as a result of relationship property settlement. The bright-line test is generally available to properties held in a trust, however, there are additional rules that apply to ensure that you cannot use the main home exemption for multiple properties through the use of a trust.
If you believe that you may be caught by the two year bright-line test or if you would like clarification of your tax obligations, please check with us before entering into an agreement to sell your property.