The Minister of Revenue has confirmed the bright-line test on residential property sales will be extended from two years to five years. At present, income tax must be paid on any gains from residential property sold within two years of acquisition, with some exceptions (such as the family home). The extension means that profits from residential investment properties bought and sold within five years will generally be taxable.

To make this happen, changes to the law are currently making their way through Parliament. It is expected these will receive Royal Assent in March and it is expected that this will affect properties acquired on or after the date of Royal Assent.

The two year period will continue to apply to properties where the first interest in land was acquired before the date of Royal Assent, which in most cases is the date of the sale and purchase agreement. There is, therefore, a small window between now and the date of Royal Assent for an investment property to be purchased which will be subject to the two-year bright-line period rather than the extended five years.

We remind you that the bright-line rules are complex and unforgiving and we have encountered situations recently where clients have been caught and taxed under these rules, which could have been avoided through discussions with us prior to decisions having been made and through appropriate tax planning. We will have more information for your on the bright-line extension when the legislation passes. Meanwhile, if you are in the process of entering into sale and purchase agreements to acquire or sell property, please give priority to discussing the tax implications with us.