IRD Enforcing Brightline Test

Sold property within two years of purchase? Expect a letter from the IRD

IRD have started sending out letters to persons who have sold land within 2 years of purchase, implying that unless the property was used as the taxpayers main home, any profit may be taxable and that the tax return should have been filed by 7 July.

What the IRD are referring to is the so called Brightline test.

Main points to note about the Brightline test are:

1. It only applies to land that is residential land i.e. it has a dwelling on it or is capable of having a dwelling on it.

It does not apply to land used for farming or business purposes.

2. There is an exemption from the Brightline test if the person has lived at the property as their main home for at least 50% of the time they have owned it.  While this sounds straight forward it can get difficult if you purchase bare land and build a home or have 2 homes.

If you buy a bare section with the intention of building a home, don’t, and sell within 2 years (now 5 years), you will definitely be liable for tax under the Brightline rules.

If you subdivide and sell your property within 2 years (now 5 years) of purchase and sell off the bare land piece, there is a view any gain on this may be taxable under the Brightline test despite the Income Tax Act providing a specific exemption for sections under 4,500m2.  We don’t believe any such gain is taxable but acknowledge that the issue isn’t specifically covered in the tax rules.

3.For land purchased after 28 March 2018 the Brightline test has been extended to 5 years which means many more property sales will be caught. 

4.If you purchase a property with the intention of it being your main home, change your mind and sell it within 5 years, any gain will be taxable.  Your intention is irrelevant.  It is what actually happened that determines if the Brightline rules apply.

What should you do if you receive a letter from IRD??

If we file your tax returns please check with us immediately. In this case you will have until 31 March of the following year to file the tax return, including any Brightline profit.