New rules were meant to dampen investor activity
The New Zealand government’s housing reforms introduced earlier this year were meant to slow down investor activity. However, the changes have impacted ordinary property owners as well.
In March 2021, the government introduced a new housing package that included extending the bright-line test to 10 years, with an exemption to incentivise new builds. It also removed the interest deductibility loophole for future investors and phased it out on existing residential investments.
Adele Beatson shared that her in-laws want to sell their Nelson property to her and her husband after failing to get a mortgage. However, the extended bright-line test means that the transaction will incur sky-high taxes.
With the new rules, the government would calculate profit for the bright-line test from the property’s market value rather than the actual sale profit, Beatson explained.
“We are now facing a $50,000-plus tax bill to purchase our property because it has increased in value by $150,000 – solely due to external forces as the property itself remains unchanged,” Beatson said, as reported by Stuff.
The couple does not want to wait out the bright-line period because they were unsure they could secure finance in another two years.
After speaking to mortgage advisers, accountants, and lawyers, Beatson found many families in similar situations to theirs.
“The extension of the bright-line period is only going to make things worse. Parental assistance is one of the few ways for people to get on the ladder, thanks to the housing crisis, and bright line is effectively removing that option,” Beatson added.
However, property accountant Anthony Appleton-Tattersall said the changes to the bright-line test did not create the problem because, under the intention test in the Income Tax Act, any profit on the eventual sale was taxable when a person bought land to sell it.
“People think ‘but if you sell it at the same price, no profit, right?’ Wrong. When land changes hands between associated parties (such as family members), the transfer is deemed to occur at market rates,” Appleton-Tattersall said, as reported by Stuff.
“While the intention test is not investigated and enforced often, bright-line certainly will be. And that provision about land changing hands between associated parties will catch plenty of these innocent family arrangements.
“But, going forward, it’s just not an option for most families to hold a property for 10 years to wait to sell it to your kid.”
Meanwhile, divorce lawyer Jeremy Sutton said the new property tax rules could also have consequences for couples going through a break-up, particularly those who owned a holiday house or investment property.
“When a couple separates, they need to divide their relationship property. If this includes two (or more) properties, usually they will keep one each or sell the secondary property, and if a property falls within the bright-line test, there are tax implications,” Sutton said, as reported by Stuff.
“Also, if one person keeps the secondary property, they may be liable for tax if they sell it within the relevant period, whereas the person who retained the family home would not be.”