bright line test

[elliot]

I intend to build a new investment property. I may sell within 5 years. If the bright line test is applied, would I calculate the value of the new home as the actual costs of building plus section or is it based on a valuation done when completed? The 2 numbers could be quite different.

[artemis]

The IRD has info, link below. Actual cost v sale amount. Also even if sold after the 5 years might still fail the intention test, so best to make sure intention is very clearly spelt out when purchasing / building. The 5 years starts at title transfer.

There is a murmur that a National government will reverse the extension and go back to the two years. National's housing policy looks like being very interesting!

When does the bright-line period start?

Generally the bright-line period starts on the date the property title is officially transferred to you, which is the date the property transfer is registered with Land Information New Zealand (LINZ).

If the property is in another country, the bright-line period starts on the date the transfer was registered under that country’s laws.

Different dates apply if you sell the land before your purchase was registered with LINZ or if you bought the land because of a subdivision of property (for example as a sale “off the plan”).

https://www.classic.ird.govt.nz/property/brightline-qa.html

[Rosco]

There are also other sections of the income tax Act where you can be taxed too. ie if subdivide or if zoning change for example! Plus intention test mentioned above, but there are also others!

Ross

[elliot]

Thanks. Okay, I accept I may pay tax under the bright line test. the question is if I build a new house how is it valued. Actual costs or valuation when the build is completed.

[Rosco]

Brightline test taxes the gain in value. So sale price, less cost , less costs to sell that aren't deductible under normal rules(Commission for example) = Gain in value

Normal expenses can obviously only be claimed once. So interest could reduce the brightline profit, but also would normally be claimed each year against the rental income.

Ross

[eri]

Tax investigators are door-knocking speculators

- including those seeking to avoid the brightline law

- as they work to reclaim $80 million in unpaid property taxes.

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12245128

[donna]

I have a subscription so here's the breakdown.

$23m in unpaid taxes = traders, IRD say of which some are actively trying to hid the transaction by claiming it was their PPOR and there were were 4000+ under review and circa 40% of those probably not compliant so that's 1600 property transactions (which if you take the $23m divide by 1600 = $14375 tax per transaction.

Andrew King surprised compliance is so low - though I think some are getting caught out probably due to misinformation from 'educators. e.g. did you know even if you move into the property while you do it up you will get done for CGT when you sell as IRD deem it your intention to make a capital gain.

What's not detailed in the article is the $57m in unpaid taxes from developers and builders for rental income, GST and other taxes and this amount is twice as large and arguably would involve less work in chasing it as there would likely be a lot few than 1600 under review.

cheers,

Donna

[artemis]

I wonder what will happen to those who don't claim rental expenses (for example they are paid in cash, rent at mates rates, or provide free to family). If they sell and it is clearly not their PPOR they will be subject to the bright line test and also possibly the intention test. And possibly raise a flag at IRD that rental income has not been declared.

Some rental owners might get serious sticker shock.

[artemis]

Bright-line test - written Parliamentary questions from Andrew Bayly.

28056 (2019) Reply. Inland Revenue has completed reviewing the bright-line transactions that took place in the 2016 tax year and found that 64 of these transactions did not comply with the rules. Inland Revenue is now focused on compliance activities for the 2017 and 2018 tax years

29478 (2019) How much money raised. No answer yet.

28062 (2019) Reply. 100 IRD staff work on property compliance.

[nick000]

Just remember that ird are now monitoring what goes on as your lawyer is required to record your ird number on purchase and sale