bright-line test taxes, land for sale sign on green grassThe bright-line test taxes the sales of residential properties which are sold within five years of purchase (or two years of purchase if the purchase occurred between 1st October 2015 and 28th March 2018 under the original bright-line test rules). Here we look at whether the bright-line test applies to the sale of bare land.

In November 2018, Sarah purchased a block of residential zoned land in Taupaki to build a house on that would become her main residence. Her intention was to move into the Taupaki property as soon as the house was finished and sell her original property in New Lynn. However, just a few weeks after purchasing the land, Sarah took a new job based in South Auckland. She decided that she no longer wanted to build and move to her Taupaki property because of the long commute. She subsequently sold the block of land in March 2019. Will the sale be caught by the bright-line test?

Under the bright-line test, ‘residential land’ is defined as:

  • Land with a dwelling;
  • Land for which the owner has an arrangement relating to erecting a dwelling; or
  • Bare land that may be used to erect a dwelling (in line with the relevant operative district plan)

In Sarah’s case, her clear intention was to build a house on the Taupaki land and turn it into a residential property. The land was sold within the five year period and therefore it is caught under the bright-line test and any gain made on the sale would be taxable.

Even though Sarah was intending to use the Taupaki property as her future main home, under the bright-line test the main home exclusion only applies if the land has been used as the main residence for more than 50% of the time of ownership and more than 50% of the property was used for that purpose. As Sarah never actually built a house the main home exclusion cannot apply.

If you have questions or concerns about bright-line test taxes and how they may apply to your situation, please contact us