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Property tax rules changed on the 1^st of October 2015 so if you’re buying or selling residential property this information is important to you, especially if you are a property investor. A new ‘bright-line rule’, which states you’ll pay tax when you buy and sell a residential property within two years, is now in place.

What is a bright-line rule?

A bright-line rule is a clearly defined rule that leaves no room for interpretation. You can think of it as someone drawing a line in the sand and it’s clear when you cross that line.

About the new rule

The bright-line rule only applies to residential properties bought on or after 1 October 2015. Under this rule you’ll pay tax on income you earn if you buy and sell a house within two years, unless you’re selling your main home, or another 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 income.

Exceptions to the rule

It’s easy to know if the bright-line rule applies in your situation or if an exception applies. Here are a few of the common exceptions:

• This rule only applies to residential property, a property isn’t residential if it’s mainly used for business or as farmland but you’ll still need to follow existing tax rules.
• If you sell a property more than two years after buying it, the bright-line rule won’t apply to your property sale. But note, 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.
• If you buy and sell your main home within two years, the bright-line rule won’t apply. 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.

More information

For more details see the IRD website or please contact us for advice.