If you’re not going to live in the property you own, are you better off renting it out or selling it? Will this make it easier for first-time homeowners to buy property?
There are many questions surrounding the bright-line test. You will have heard a lot of discussion about it in the news recently. It’s been around for years. However, recent changes have been made to it that are intended to slow down the real estate market to help prospective new homeowners get on the property ladder. In short, the government is hoping to deter property investors from pushing prices up. This is by taxing people who profit from buying and selling property.
Hence, we thought we’d answer a few frequently asked questions here to help you make informed decisions about how the recent changes to the bright-line test may affect you.
What exactly is the bright-line test?
It is legislation that was initially introduced in 2015 as part of the Income Tax Act. So it is an amendment to taxation law. Its full name is the “Taxation (Bright-line Test for Residential Land) Act 2015”.
When introduced in 2015, the bright-line test was a way for the government to tax property owners who sold a residential property that was not their main/family home within a stated number of years of purchase. Originally, that period was two years. If you bought and sold residential land/property within two years. You were required to pay income tax on any gains from the sale.
The time period was then increased from two years to five. Though in March 2021, the period changed from five to 10 years. In short, if you acquired the property on or after 27 March 2021. The bright-line property rule may apply if you sell it within the 10-year bright-line period.
Why is it called the bright-line test?
The phrase is a legal term used for a clearly defined rule or standard that uses objective factors to make the rule unambiguous. It is designed to produce predictable and consistent results. (One would hope that all rules in the legal system are designed to be unambiguous and producing consistent results. But perhaps that’s a topic for another blog … )
Does the bright-line test apply to everyone?
In the information provided by the government and the tax department, the wording used is “the bright-line property rule may apply”. The word may is used to let you know that there are conditions under which the rules don’t apply. These conditions are best summarised in this graphic provided by Inland Revenue:
Should I sell my property or hold on to it and rent it out?
This is a very personal question. The answer depends on why you’ve bought a property in the first place. What category of a property owner are you?
If you are a property speculator, you will be used to buying and selling within a short period. Speculators purchase houses with the sole aim of buying, making improvements, then selling for a profit. The sale price is always going to be higher than the original price because improvements have been made. In our opinion, there is nothing wrong with that. The new taxation laws, in practice, don’t really affect speculators. This is because they’re not holding on to properties for two or five years anyway. They certainly are not holding on to them for ten years if their main goal is to buy, renovate and sell for a profit. Therefore, property speculators are not going to be deterred by the change in legislation.
Will I be affected by the new legislation changes?
If you are someone who owns a property but has decided to move out of it and rent it temporarily. You may be affected by the change in legislation. We see property owners in this category all the time. People move out of their homes temporarily for many different reasons. For instance, changes in work circumstances or location, opportunities to travel. (Not as common these days, but it does still happen), a desire to be closer to other family members or help with ageing parents, etc. We would always consider the feasibility of holding on to the property and renting it out for someone like this. Property increases in value over time if you look after it and own it in a desirable area. Therefore, it’s usually worth holding on to it if you can and if you don’t need a quick release of equity.
If you need to move out of the home you own for any of the reasons mentioned. Renting it out is a great option. Not only are you holding on to an appreciating asset. However, you’re also avoiding paying tax on gains from a sale.
It’s worth looking at the examples on the Inland Revenue website that show how tax is calculated for various scenarios.
What does Copo think?
In our opinion that the bright-line test doesn’t really affect the people; it was meant to impact. It’s our view that speculators will continue buying and selling as they do. If anything, the change in legislation to ten years might encourage non-speculators to hold on to property longer. Reducing the number of homes turning over for sale. The reduction in stock will just drive prices higher. Which is not what the property market needs if you ask a potential buyer.
If you’re interested in running the figures for your own property and personal circumstances. Please get in touch with us at Copo. The team at Copo can also advise whether your property would make a good rental and what would be involved in that.