The Government will extend the 2-year bright-line test for residential investment property sales to a 5-year test.

The Bill containing the new rule is likely to be passed in March 2018.

The current bright-line test requires tax to be paid on gains derived from the sale of residential properties if they are sold within two years of acquisition, with some exceptions.

The 2-year test extended the reach of the extant law that applies to tax gains on the sale of property acquired with the intention of resale. You see it was hard to prove what a taxpayer’s intention was, so the 2-year rule gave the IRD more teeth and a clear mandate to tax gains on the disposal of property, regardless of whether the taxpayer acquired the property with the intention of resale or not.

The change to a 5-year rule is an attempt by the Government to further discourage property speculation and keep a lid on house prices, thereby making house more affordable.

Five years is a good sight longer than two years and so the potential for it to overreach its mark and tax people who are not property speculators is high. A greater number of non-speculators who sell their holiday homes, or rental properties for genuine reasons will be caught.

While the Government’s goal is an attempt to keep house prices in check, it is not immediately obvious that this will be the result. Speculators and non-speculators alike may put off selling their properties until after 5 years - an occurrence known as “lock-in”. This will mean less properties come on to the market pushing up demand for those that do, and therefore the price.

Further, speculators and investors may be discouraged from purchasing rental properties meaning fewer properties will be available which could put upward pressure on rents for tenants.

The new 5-year rule will not apply to properties if the sale and purchase agreement is entered into before the date of enactment of the Bill.

So, if you are contemplating purchasing a holiday home or residential investment property best get in and get the agreement signed as soon as you can.

Key points

• The bright-line test only applies to residential land, not commercial property, business premises or farmland.
• The 5-year period will generally run from the date of settlement to the date a person enters into an agreement to sell the property.
• The test does not apply to a person’s main home. A person can only have one main home.
• The main home exemption from the rules is available to properties held in a trust.
• There are exceptions for relationship property and inherited property.

Please contact Grant Neagle on 07 927 1225 or if you have any questions.

The comments in this article are of a general nature and should not be relied on for specific cases. Taxpayers should seek specific advice.