The bright-line test extension
The changes to the bright line test are documented here.
There is still a “main home exemption” to the bright line test. If you sell the property within 10 years of acquisition (or 5 years for a new build), and it was your main home for the entire time you owned it, you will not pay tax under the bright-line test on any gain in value.
However, the Government is introducing a ‘change-of-use’ rule, which will impose income tax on a proportion of the profit made through the property increasing in value, where property has moved to and from being a main home for more than 12 months. The income tax payable is calculated as follows:
- Subtract the purchase price from the sale price
- Subtract the cost of capital improvements the owner has made
- Subtract the costs to buy and sell the property
- Multiply the result by the proportion of time the property was not being used as the owner’s main home.
It is important to note that this rule will only apply to homes subject to the new 10 year bright-line test (or 5 years for new builds acquired after 27 March 2021).
If you are using property for short-stay accommodation (where the owner does not live in the property), the bright-line test will also apply.
Interest deductions on Residential Property income
From 1 October 2021, property investors will be unable to deduct their interest costs from their taxable rental income on property that has been acquired on or after 27 March 2021.
For properties acquired before 27 March 2021, interest on loans can still be deducted; but the amount of interest deductible will be reduced by 25% over the next four income years.
This means that by the 2025-26 income year, no interest will be deductible.
If a property was acquired before 27 March 2021, and additional lending (to maintain or improve the property) is entered into on or after 27 March 2021, then the interest on the additional lending will not be deductible from 1 October 2021. This means that anyone with a floating mortgage will need to monitor their accounts closely.
Property developers and builders are not affected by this change. The rule change also does not apply to loans for non-housing business purposes.
Exception for new builds
At the present time, the extension to the bright-line test will not apply to new builds and the government is intending to consult on whether new builds acquired as a residential investment property should be exempt from non-deduction of interest.
Other rules still apply
The tax rules that apply to speculators, land developers and dealers will continue to apply irrespective of the date of acquisition.
For those who frequently buy and sell their ‘main home’, you will be unable to use this exemption if it is used twice or more over a two year period immediately before the ‘main home’ was sold.
What else is happening?
The 3.8 billion “Housing Acceleration Fund” will assist Developers with new builds, by covering the costs of vital infrastructure (such as roads and water reticulation).
Below are a list of examples that may help you understand these changes better:
- George purchased an investment property in July 2020 for $500,000.00. In 2024, he sold the property for $650,000.00. Because George purchased the property before 27 March 202 (and after 29 March 2018), the applicable bright-line period is five years, and the change of use rule does not apply. As he has sold the property within five years, George will need to add the $150,000.00 profit to his income, and pay tax accordingly.
- Karina and Simon purchased their main home in Wellington in January 022 for $850,000.00. They lived there until January 2024, where Karina and Simon were seconded to Nelson for 18 months. Upon returning to Wellington 18 months later, they decided to sell their Wellington home and move to Nelson once the house sold. The house sold for $975,000.00 in January 2026. There were no capital improvement or sale costs. As Karina and Simon purchased their home after 27 March 2021, and they spent more than 12 months with this home not as their ‘main home’, the change of use rule applies and they will need to pay tax on the period they were away. $125,000 x 0.375 = $46,875 of taxable income.
- Rupeni purchased an investment property off the plans for $400,000.00. The agreement for sale and purchase was signed on 27 April 2021, and the house was completed in June 2022. Rupeni decides to sell the property in July 2027 for $900,000.00. As Rupeni has owned the property for five years and one month, the bright-line rule does not apply to him (new builds are still subject to the five year restriction).
The above information is of a general nature only. The information in this article in no way constitutes legal advice and you should contact your legal advisor for advice relating to your specific circumstances.
The team at Gibson Sheat are happy to have a discussion with you regarding any questions or concerns you may have.
P: 0800 55 44 66
E: info@gibsonsheat.com
