What is the new bright-line rule?
Old rule to 28 March 2018 – within 2 years
Prior to 29 March 2018, the bright-line rule only applied to residential properties bought on or after 1 October 2015. Under the rule you had to pay tax on income you earn if you buy and sell a house within 2 years, unless you’re selling your main home or another exception applies. All other existing property tax rules still applied.
Now that bright-line property rule has changed.
New rule from 29 March 2018 – within 5 years
From 29 March 2018, people who sell a house in New Zealand within 5 years of buying it must pay income tax on any gains, unless it’s their main home or another exception applies.
If you bought a house 1 October 2015 to 28 March 2018, the original 2 year bright-line rule still applies for you. That means if you sell your house within 2 years of buying it you’ll pay income tax on any gains, unless an exception applies.
All existing property tax rules still apply. So even if the bright-line rule doesn’t apply in your situation, that doesn’t necessarily mean you won’t need to pay tax on your property profits.
Information requirements
When buying, selling or transferring New Zealand property, excluding your main home, you’ll need to provide your –
- IRD number
- Taxpayer identification number (TIN) from any overseas countries where you have to pay tax on your worldwide income, if you have one.
You’ll give your property lawyer or conveyancer this information. You may choose to do this by filling in a Land Transfer Tax Statement, which is available on the Land Information New Zealand (LINZ) website.
Non NZ citizens
The New bright-line rules that apply for residential properties deals for NZ citizens also apply to non-NZ Residents. If you are a non-residents you will need to obtain a NZ Tax Number (IRD Number) as well as a valid NZ bank account. This because when you can apply for a Tax Number you’ll need a fully functional New Zealand bank account details included in your IRD number application
Inland Revenue will send you your IRD number within 10 working days of receiving your application. If you’re thinking about buying, selling or transferring New Zealand property, plan ahead and get your New Zealand bank account and IRD number as early as possible.
Questions and answers on the new Bright-line Rules
1. Why has this change been called a “bright line rule” or “bright-line test”?
A bright-line rule (or bright-line test) is a clearly defined rule that leaves no room for interpretation.
You can think of it as someone drawing a line in the sand. It’s clear when you cross that line.
The new bright-line property rule says you’ll pay tax when you buy and sell a residential property within two years, unless an exception applies. It’s easy to know if this rule applies in your situation.
All existing property tax rules still apply. So even if the bright-line rule doesn’t apply in your situation, that doesn’t necessarily mean you won’t need to pay tax on your property income.
2. When does the new bright-line rule apply from?
The bright-line rule applies to the sale of any residential property you’ve bought on or after 1 October 2015.
But whenever you buy a property intending to resell it, you’ll need to pay tax on any income you make when you sell that property.
3. You said the bright-line rule applies when I buy and sell a residential property within two years (and none of the exceptions apply). When does that two-year period start from?
Generally the two-year period when the bright-line rule applies starts on the date a property transfer is registered with Land Information New Zealand (LINZ). If the property is in another country, it’s the date the transfer was registered under that country’s laws.
Different dates apply if you sell the land before your purchase was registered with LINZ or if you bought the land as a result of a subdivision of property (for example as a sale “off the plan”).
4. What types of property does this rule apply to?
The bright-line rule only applies to residential property. A property isn’t residential if it’s mainly used for business or as farmland. That means if you sell farmland or business property, the bright-line rule won’t apply. But you’ll still need to follow existing tax rules. Talk with your tax advisor if you need more information about this.
5. What if I sell my property more than 2 years after I bought it? Do I have to pay tax?
If you sell a property more than two years after buying it, the bright-line rule won’t apply to your property sale. But the intention test may still apply. The intention test says you must pay tax on property income if you originally bought a property with the intention to resell it. The intention test isn’t a new rule. It’s been around for a long time.
6. What happens if I make a loss on a property sale, instead of a profit?
Under the bright-line rule, if a residential property was sold at a loss within two years (and no exceptions to the rule apply), these losses would be “ring-fenced”. If you owe income tax on another residential property sale in the future, you can subtract these “ring-fenced” property losses from the income you earned on this later sale. That means you’ll pay less tax on the later sale.
7. I know that my student loan repayments / Working for Families Tax Credits / child support are calculated based on the income I earn. How will earning extra income, for example from property, impact these?
If your income changes at all during the year, it could impact how much:
- Working for Families Tax Credits you receive
- of your student loan you need to repay
- child support you pay or receive
Let IRD know whenever your income changes to make sure you pay or receive the right amount and avoid getting into debt.
8. What if I sell overseas property? Do I have to pay tax in New Zealand?
New Zealand tax residents pay tax in New Zealand on their worldwide income. If you’re a New Zealand tax resident who earned income selling a property in another country, you may need to pay tax there. You’ll also include it on your New Zealand income tax return and pay any tax. If this situation applies to you and you need advice to be sure you get you taxes right, please contact your tax advisor.
Exceptions to the bright-line rule
(i.e., when the bright-line rule won’t apply to my property sale)
1. What does “main home” mean under the bright-line rule?
You could think of your main home as your family home. Your main home is the property you have the greatest connection to. To be eligible for the main home exception to the bright line rule, you need to have used a property as your main home for 50% or more of the time that you’ve owned it. You also need to use more than 50% of the area of the property as your main home. (The area that counts as your main home generally includes things like your yard, gardens and related buildings like the garage.)
This is an important point if you rent out a granny flat attached to your house or part of your house is used as a business. As an example, if you use 40% of a property as your home and 60% as a rental property, you won’t be eligible for the main home exception if you sell that property.
If you live in more than one property, you’ll need to decide which your main home is. To decide if a property you own qualifies as your main home, think about:
- where your personal property is kept
- the amount of time you spend living in each house
- where your immediate family lives
- where your social ties are strongest
- your use of the home
- what other ties (for example: employment, business, economic) you have with the surrounding community
2. What’s the main home exception to the bright-line rule?
If you buy and sell your main home within two years, the bright-line rule won’t apply. It’s an exception to the bright-line rule. It means that you generally won’t have to pay tax when you sell your main home.
But you can only use the main home exception twice over any two-year period. You’d have to pay tax on any income you make from the sale of a third property in two years because you’d no longer be eligible for the main home exception. You’re also not eligible for the main home exception if you show a regular pattern of buying and selling residential property.
3. Who decides if the main home exception applies to me?
The person selling a property decides if it’s their main home. You’ll do that based on the criteria listed above. If you need help figuring out if an exception to the bright-line rule applies to you, talk to your tax advisor.
4. Can I have more than one main home?
No, you can only have one main home. If you live in more than one house, your main home is the one that you have the greatest connection to. You’ll find the criteria for deciding which property is your main home listed above.
5. My main home is held in trust. Am I eligible for the main home exception if I sell it?
Residential properties held in trust can use the main home exception under the bright-line rule if:
- the house sold was the main home of the principal settlor of the trust, or the principal settlor doesn’t have a main home, and
- it was the main home of a beneficiary of the trust
The principal settlor of a trust means the settlor whose settlements to the trust have been greatest by market value. In other words, the principal settlor is the person who has made the biggest financial contribution to the trust. Talk to your tax advisor if you need advice.
6. What if I inherit a property? Does the bright-line rule apply to me?
The bright-line rule does not apply if you sell a property you inherited.
7. What if I received a property as a part of a relationship break-up? Does the bright-line rule apply to me?
If you receive a property as part of a relationship settlement agreement, you won’t need to pay income tax on the property when it’s transferred to you. However, if you go on to sell this property within two years of its original purchase date, the bright line rule will apply.
Income tax filing and paying
1. How and when do I pay the tax I owe on income I’ve made from a property sale?
Before you pay the income tax you owe on your property sale, you’ll need to complete an income tax return. You’ll generally include the amount of property income you’ve earned in the “other income” box on your return. You’ll also complete a Property Sale Information (IR833) form and submit this along with your income tax return. This form will be available on our website from 1 April 2016. Once your income tax return is filed with IRD, you’ll need to pay your income tax by the due date.
2. What happens if I make a mistake on my income tax return?
IRD know that sometimes people make mistakes. If you get something wrong on your income tax return, IRD encourage you to let them know as soon as possible so that they can help you get it corrected. IRD call this making a voluntary disclosure.
3. What happens if someone doesn’t include their property income on their income tax return when they should?
It’s unlikely, but some people may knowingly provide false or misleading tax information to IRD. That’s against the law. If convicted, it can mean a substantial fine or jail time. It’s just not worth the risk.
Requirements when buying, selling or transferring property
General questions
- Why did Government make these changes? These changes are designed to help improve compliance with property tax laws.
- I was in the process of buying or selling property on 1 October 2015 when these changes came into effect. Do I have to meet these new requirements? Some people will have been partway through the process of buying, selling or transferring a property on 1 October 2015 when these new rules came into effect.These new rules will not apply where the:
- contract for the transfer is entered into before 1 October 2015, and
- transfer is registered with Land Information New Zealand (LINZ) on or before 1 April 2016
If you have questions about what stage you are at in the land transfer process, talk to your property lawyer or conveyancer.
- Who needs to provide an IRD number when buying / selling NZ property?
Everyone who buys, sells or transfers New Zealand property must provide a New Zealand IRD number during the land transfer process, unless they are eligible for the main home exemption.
People with property in trust must provide an IRD number for the trust. An individual trustees’ IRD number can’t be accepted.You’ll provide your IRD number to your property lawyer or conveyancer. You may choose to do this by providing them with a completed Land Transfer Tax Statement, which is available on the Land Information New Zealand (LINZ) website. - What’s a taxpayer identification number (TIN) and who needs to supply one when buying or selling New Zealand property?
A taxpayer identification number (TIN) is given to a person or entity by the tax authority of a country. You’ll use it when you meet your tax responsibilities in that country. In New Zealand, our IRD number is our TIN. Overseas TINs have many different names.If you buy or sell property in New Zealand, and you’re not eligible for the main home exemption, you’ll need to supply a TIN for any county where you currently have to pay tax on your worldwide income. - Do these new rules just apply for residential property?
All people buying and selling all types of property (residential, commercial etc.) must provide an IRD number and TIN(s) (where applicable), unless they’re eligible for the main home exemption. - When and how do I provide my IRD number / TIN?
You’ll give your property lawyer or conveyancer this information when they’re helping you to transfer the property. You may choose to do this by filling in a Land Transfer Tax Statement from the Land Information New Zealand (LINZ) website or from our Tax Forms section. - What happens if I make a mistake when providing information?
IRD know that sometimes people make mistakes. If you get something wrong on your Land Transfer Tax Statement, talk to your lawyer or conveyancer to help sort this.You should only follow up with your lawyer or conveyancer when you’ve made a mistake – not when your situation has changed after providing this information. - What do I do if my situation changes after I provide information?
You might have thought the house you were buying would be your main home, but it turned out you had to move to another city and so you fixed up and sold the house you bought.
Or you might have thought you would buy and sell a house for profit, but loved it so much you moved in and it became your main home.If your situation changes after you buy your house, you don’t need to do anything until you sell or transfer your property. Then you’ll complete a new Land Transfer Tax Statement from LINZ with the correct information. - What happens if someone intentionally provides incorrect information?
It’s very unlikely, but some people may knowingly provide false or misleading tax information on their Land Transfer Tax Statement from Land Information New Zealand (LINZ). That’s against the law. If convicted, it can mean a substantial fine. It’s just not worth the risk.
Main home – what does that mean?
- Am I eligible for the main home exemption?
If a property is your main home, you won’t need to provide your IRD number or a taxpayer identification number (TIN). However you’ll still need to provide information to your property lawyer or conveyancer to confirm you’re eligible for this exemption. You may choose to do this using a Land Transfer Tax Statement, which is available on the Land Information New Zealand (LINZ) website or via the link below. Only New Zealand citizens and New Zealand residence visa holders are eligible for the main home exemption.
However, you’re not eligible for the main home exemption if you:- are a New Zealand citizen who has been overseas continuously for the last three or more years
- have a New Zealand residence visa and have been overseas continuously for the last year or more
You’re also not eligible for the main home exemption if you’re transferring property that’s in trust.
- Can you have more than one main home?
No, you can only have one main home. - How can I tell if a property is my main home? Your main home is the one that you have the greatest connection to. If you live in more than one house, think about the following to decide which one is your main home:
- where your personal property is kept
- the amount of time you spend living in each house
- where your immediate family lives
- where your social ties are strongest
- what other ties (for example: employment, business, economic) you have with the community
- Who determines if a property is a main home? The person buying or selling the property determines whether it’s their main home and either:
- tells their property lawyer or conveyancer when they meet and documents this with them, or
- let’s their lawyer or conveyancer know by filling out a Land Transfer Tax Statement from Land Information New Zealand (LINZ)
Property in Trust
- I am a trustee who is buying, selling or transferring property that’s in a trust – what do these changes mean for me?
When ownership of a property that is held in trust is being bought, sold or transferred, an IRD number for the trust must be supplied. An IRD number for a trustee cannot be accepted. If your trust doesn’t have taxable income, you may not have an IRD number for it. However, it’s easy to apply for an IRD number for your trust.This change will help enable Inland Revenue to identify the right customer for the property sale or purchase. If your trust has a current taxpayer identification number (TIN), you’ll supply this as well. - Is a family home held in trust eligible for the main home exemption? No. Properties held in trust are not eligible for the main home exemption. The law says if your property is held in trust, you must supply an IRD number for that trust when you buy, sell or transfer property. An IRD number for a trustee can’t be accepted.
IRD numbers
- Where can I find my IRD number?
You can often find your IRD number on your payslip. It’s on all letters from Inland Revenue. It’s also available through your myIR Secure Online Services. Or you can call the IRD. - How do I apply for an IRD number?
You can find out how to apply for an IRD number on the IRD website. - How long does it take to get an IRD number?
We’ll send your IRD number to you within 10 working days of receiving your application, if you provide all of the information IRD need to process your application. This timeframe is the same whether you’re in New Zealand or overseas.
Bank accounts
1. Who needs a bank account to apply for a New Zealand IRD number?
Anyone who does not have New Zealand citizenship or a residence visa must have a fully functional New Zealand bank account before applying for an IRD number.
You’ll also need a New Zealand bank account before applying for a New Zealand IRD number if you’re:
- a New Zealand citizen who has been overseas continuously for the last three or more years
- have a New Zealand residence visa and have been overseas continuously for the last year or more
2. Why do I need to have a bank account number to get a New Zealand IRD number?
The bank account requirement ensures that full anti-money laundering rules apply for non-residents before they buy a property in New Zealand.
3. You said I’d need a “fully functional bank account” to apply for an IRD number. What does that mean? A fully functional New Zealand bank account is one where:
- you can make deposits and withdrawals
- the account holder’s identity is verified in line with New Zealand legal requirements
You’ll need to provide proof that your New Zealand bank account meets these requirements along with your completed IRD number application form.
IRD recommend that you take the Documents to confirm your New Zealand bank account is fully functional (IR984) information sheet to your bank. This will help you ensure that you provide IRD with right details to confirm your bank account meets legal requirements.
- I live outside of New Zealand. Which New Zealand banks should I contact to get a bank account? Several New Zealand banks offer the fully functional bank accounts required in order to apply for an IRD number. Contact New Zealand banks to find the one that’s right for you.
- How long will it take me to set up a New Zealand bank account? There are many variables that could impact the length of time it could take you to set up a New Zealand bank account. For example: if all required information is provided along with your application or if you’re emailing or posting information.There is no standard time to set up an account with a New Zealand bank.
Proposed change: Residential land withholding tax
- I heard that a residential land withholding tax change is being considered – what’s happening with that?Parliament is considering additional residential land withholding tax rules.