Bright-Line Test and a Main Home Exclusion

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A new Taxation and Remedial Matters Act 2022 has been recently enacted, and it adds many changes to the Income Tax Act 2007. I have heard one tax professional referring to it as a “rabbit hole”. I must say, one will need to dedicate hours to get familiar with the changes and implications of the new rules.

The “Main home exclusion rule” refers to an exemption from payment of tax on any gains from a sale of a property when the property is sold within a certain period. This is also known as a Bright Line Test period.

You may recall the very first Bright Line Rule was introduced on 1 October 2015. If you purchased your property prior to 1 October 2015, the new rules would not apply to your situation.

The second Bright Line change covers a situation where you acquire a property between 29 March 2018 and 26 March 2021 and sell it within the five-year period.

If this was your main home, you will be covered by the Main Home Tax Exemption, but only if you used it predominantly as your family home.

If you rented your house out, partially, or fully, to a generate some rental income, there may be tax to pay on the gains.

The latest tax act amendment introduced a change to how the gain is calculated for the properties purchased on or after 27 March 2021.

If you purchased your home after 27 March 2021 and sell it within 10-year period you will have no tax to pay on gains from the sale, but only if for all the days in the ownership period, the house has been used predominantly as your main home.

Example: Main home exclusion

Freddy purchased a property in 2022. He lived in it for five years and rented it for four years before selling it in 2031. The total ownership equals nine years.

Freddy will have to pay tax on gain, because the property was purchased in 2022, after 27 March 2021, and the house was rented for four years. However, the taxable amount will be reduced to reflect the period for which the property was used as his main home.

We would have had a different tax outcome if Freddy purchased the property prior to 27 March 2021.

Freddy would have qualified for the main home exemption because for most of the bright-line period (that is, more than 50 percent) the house was used as

Freddy’s main home. Freddy would have no tax to pay.

My advice is this: if you do not have an accountant, and rent your house out, please remember to keep records of your rental income, rental periods, and expenses, these will be needed to calculate your taxable income for this activity.

Also please get professional advice before selling the property. As with everything in life, if you know what’s coming your way, you can prepare for it.

Related: Emerald business advisors – Putting the shine into business success

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Valerie Rowe-mitchell
Valerie Rowe-mitchell
Accounting and other money matters with Valerie Rowe-Mitchell, owner of Emerald Business Advisers. Valerie can be reached on 07 579 5777 or valerie@emeraldbusiness.co.nz

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