It has long been the case that you must pay income tax if you originally purchased a property with the intention of on-sale. The problem for the IRD was that it is very difficult for the IRD to prove that this was a taxpayer’s intention for selling.
For example, a seller could simply argue they were selling because they had ‘changed their mind’ about wanting the property to be their family home. This led to the introduction of the bright-line test in 2015. The bright-line test of 2015 established that income tax must be paid on the profit from any property sold within two years of it being purchased if it was not the seller’s main home during that time (or no other statutory exceptions applied, for example, an executor selling a property).
The decision by the new Government to extend the bright-line test on property from two years out to five was clearly flagged during last year’s election campaign and has now been passed. The exceptions remain in place.
Generally speaking, the five-year test applies from March 29, 2018. If you purchased a house between 1 October 2015 and 28 March 2018, the original two-year test still applies.
Tax issues require specialist advice, and there are many fishhooks which can catch clients out. We advise all clients to talk with their accountants regarding any potential tax implications when they are both selling and buying property.
And make sure you speak to your accountant (and us!) before you sign the agreement for sale and purchase!