Changes to the Bright-line Test and its Implications for Residential Property Owners.
From 1 July 2024, the 5 and 10 years bright-line tests for residential land has been replaced by a new 2-year bright-line period. The changes in interest deductions will also have implications for new and existing residential investment property owners.
Bright-line Period
The start date of the bright line period is (generally) when the transfer of land is registered with Land Information New Zealand (LINZ), and the end date is (generally) when the binding sale and purchase agreement (SPA) is entered into.
Prior to 1 July 2024, the main home exclusion applies based on the time that the property is used as the main home and the land area of such use. For example, if the property was used as a main home for 30% of the time, 70% of the bright-line gain will be taxable.
The main home exclusion from the bright-line tests has now changed. The exclusion will apply in full, if the property has been used as a main home for more than 50% of the time (and more than 50% by land area).
This essentially puts the main home exclusion criteria back to its original policy setting of “all or nothing test”, which is, the main home exclusion either applies or does not.
Interest Deductibility for Residential Investment Property
The second change implemented by the government and of greater consequence, is the change to interest expense as a tax deduction on residential properties.
The previous government phased interest deduction out and removed it entirely for deduction from 1 April 2021. However, the current coalition government is phasing it back in.
The phase-in started from 1 April 2024, with 80% of interest costs incurred from that date will be deductible. As from 1 April 2025, the interest will become fully deductible.
Please visit the Inland Revenue website here for further details.
If you feel you could use some specialist advice, don’t hesitate to contact the Property or Commercial Team.
