Property investors will be familiar with the bright-line test where there are potential tax issues if a residential rental property is owned for less than two years before it is sold. In addition to rental properties, the sale of a holiday home can be subject to a tax liability, as it is not a primary residence which is exempt.

In the current buoyant property market, many property investors have been considering selling other properties that form part of their rental portfolios.

Extended from two to five years

To help keep a lid on the property market, the Minister of Revenue recently announced an extension to the bright-line test period from two to five years.

The five-year period took effect from 29 March 2018; the two-year period continues to apply to any property bought before this date.

Inland Revenue states that, in general, the acquisition date is the date of registration of the purchase and that the ‘disposal date’ is the date on the agreement.

Care needed when selling

If you are selling a property within, or close to, the two-year period from when you purchased it, do talk with us before you sign the agreement; you do not want to get caught by any unexpected tax liability. These rules are complex and are strictly enforced by the IRD. There have been recent examples where sellers have misunderstood the timeline and have found themselves liable for tax in relation to the sale.

In the future, if you’re selling your investment property, you will need to consider whether or not the period you have owned it is covered by the two-year rule or the five-year rule.