The Bright-line Test: Main Home Exclusion

Bright-line test main home exclusion picture of property tax house on coinsEarlier this year the bright-line residential property rule was extended from two years to five years. The original two-year period still applies to properties purchased between 1st October 2015 and 28th March 2018, and from 29th March 2018 onwards the five-year bright-line test now applies.

There are three main exclusions to the bright-line test:

  1. Family (main) home
  2. Inherited property
  3. If you are the executor or administrator of a deceased estate
Main Home Exclusion

If the main home exclusion applies the income earned from the sale of the property generally won’t be taxed. It is up to the property vendor to decide if the property is their main home by reviewing the exclusion criteria. You are eligible for the main home exclusion if:

  • You used the property as a family/main home for more than 50% of the time you owned it; and
  • More than 50% of the area (including garage, gardens, front and backyards) of the property has been used as your family/main home.

You can only use the main home exclusion a maximum of twice during any two-year period, and it won’t apply if you have a regular pattern of buying and selling residential property.

Case Study 1

John purchased a property in Blockhouse Bay with three brick and tile units, all on a single title. He lived in one unit as his main home and rented out the other two units. Six months later, John sold the entire property at a profit of $100,000.

The main home exclusion may not apply if you rent out more than 50% of the property you live in. In John’s case he rented out two of the property’s three units, or approximately 66% of the land. As the majority of the land was used as a rental property the main home exclusion does not apply and he will need to pay tax on the income from the sale.

Case Study 2

Julie owns a three-bedroom bungalow in Warkworth, and one year ago purchased a small apartment in a high-rise in the Auckland CBD which is walking distance to her job. She lives in the city apartment from Monday to Thursday and returns to her Warkworth apartment on Fridays for the weekend. Her adult daughter also lives in the Warkworth property, along with their two dogs and three cats. When her job is made redundant, Julie decides to sell the city apartment.

If you own and live in more than one property, you must decide which one is your main home – you can’t have more than one main home. Part of the IRD’s criteria for this is deciding which home you have the greatest connection with. You should consider aspects such as which home your immediate family live in, where most of your personal property is kept and the amount of time you spend in each home. In this case although Julie spent four nights each week in her city apartment, her daughter, family pets and belongings are all at the Warkworth bungalow, most of her friends live in that area, and she volunteers at the local animal shelter every Sunday. Therefore Julie has a greater connection to her Warkworth residence and it will be classed as her main home. Income from the sale of Julie’s city apartment will not fall under the main home exclusion.

Case Study 3

Keith is a residential property dealer and over the past five years has bought and sold three houses in the Massey/Swanson area. He has lived in each of those three houses with his wife and two primary school-aged boys.

Although Keith has lived in each of his properties with his family, he has a regular pattern of buying and selling residential properties. Therefore any profit he made from selling those homes will be taxable.

Residential Properties In Trust

The main home exclusion can still apply to a residential property owned by a trust. In this instance the property must be occupied and be the main home (as per the main home criteria) of a beneficiary of the trust. However, if the principal settlor of a trust has a main home that is not owned by the trust then the main home exclusion can’t apply to any property owned by that trust.

Please contact us if you have any questions regarding the bright-line test and the sale of residential property.

2018-10-30T11:13:54+00:00October 30th, 2018|Property Accounting, Tax|

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