The Bright-line Test

The bright-line test when parents help their kids buy a house.

The bright-line test is designed to require investors to pay tax on the sale of properties that are bought and sold within a set period.

When the rule was first introduced, a property that was not owner-occupied and bought and sold within two years was captured. Then the time limit was extended to five years. Last year, it was pushed out to 10.

Any gains that are made on a property are taxed at the owner's marginal tax rate. But Walker said people could be caught out if their "investment" was putting money into a child's house to help them purchase. If their child then bought them out of the share within 10 years, they could end up with a tax bill.

This can happen even if parents do not try to make a “gain” from the sale.

"If a parent agrees to sell their share of a house to the child at cost, they will be deemed to have received the current market value for tax purposes,” Walker said.

She said if someone was buying out their parent in stages, they could find that each time the ownership shares changed, it could reset the clock on the bright-line start date.

"Specific provisions came into effect on March 27, 2021, to ensure that the bright-line clock only restarts to the extent that an owner’s interest has increased and not for any share already owned. However, clarification around which bright-line test will apply in a situation where a share of residential land was acquired before March 27, 2021– subject to the five-year bright-line test – and subsequently an additional share is acquired on or after March 27, 2021 - subject to the 10-year bright-line test – is still required.

She said there was probably growing awareness of it being a potential issue, but more people would be captured over time as the 10-year bright line period took in more properties.

For more information or if you have any questions about this please get in touch with claire@foundationlegal.co.nz or bridget@foundationlegal.co.nz