Earlier this year I wrote about some of the dangers posed by the bright-line rule when restructuring. I did this because the bright-line rule is something we grapple with daily at GRA. However, there is a series of questions that come up on a regular basis that I did not get a chance to address in this previous article, and I cover these below.
If I subdivide a property creating a new lot, does the bright-line “clock” restart when the new title is issued?
No. The issue of new titles as a result of subdivision does not lead to a reset of the bright-line clock. The bright-line clock starts on settlement of the original purchase as a single lot. Sale after either two or five years (depending which period applies) post settlement will not be subject to the bright-line rule, even if there is subdivision and issue of new title just before sale. Note that there may be other provisions that are relevant here, but today the focus is solely on the bright-line rule. Note further that if you shift the asset to a new entity, the clock does restart.
If my home is owned by a family trust and sold within the bright-line period can I get the main home exemption?
Yes you can. There are some provisions of the Income Tax Act where the residential home exemption does not apply if your home is owned in a family trust. The bright-line is not one of those. It is possible for a family trust to qualify for the home main exemption, although there are some limitations. You cannot rely on the main home exemption more than twice in a two-year period and you lose the benefit of it if you engage in a regular pattern of buying and selling homes. There is also a complex test to ensure that the property being sold is the one main home of the main settlors of the trust. I further note that you are only allowed to claim the exemption on one home, so holiday homes get caught by bright-line rules.
If I subdivide a section off my home and sell the section as bare land within the bright-line period, can I get the benefit of the main home exemption?
Yes you can. There has been debate as to whether you can claim the main home exemption when selling land that does not have a dwelling on it. The IRD have issued a draft statement advising that in their view the key point is whether or not the land was used as part of the private residence pre-subdivision. Thus if someone cuts off and sells their back garden that they previously enjoyed as part of their home, they will get the main home exemption.
If I signed up a property off the plans before the five-year rule came in on 29 March 2018, but have not settled yet, am I subject to the two or five-year period?
In relation to ‘off the plan’ sales, the two-year rule applies where a binding sale and purchase agreement was entered into prior to 29 March 2018 but after September 2016. The five-year rule applies where the agreement is entered into on or after 29 March 2018.
If I sign up a property off the plans and it takes two years to get title and settle, does the bright-line clock only start ticking at that point of settlement meaning that I have to hold the property for a further five years (assuming the five-year rule applies) to fall outside of the bright-line rule?
No you do not. Although the bright-line clock typically starts ticking at the point of settlement, there is an exception where a property is bought off the plans in that the bright-line period commences on the date that you enter into the sale and purchase agreement.
In summary, there is a series of quirks and exceptions to the bright-line rule which otherwise should be a relatively black and white tax rule to apply. The above is just a taste of some of the questions that we see arising most frequently. As always, we encourage you to seek professional advice when selling a property if concerned about any gain being taxable. For further assistance with this and other property taxation matters, please contact us on 09 522 7955, firstname.lastname@example.org, or by filling in our online form.