Brightline Test
A New Zealand tax rule that requires income tax to be paid on any profit made from selling residential property within a set period after purchase.
What is a Brightline Test?
The brightline test is an Inland Revenue rule designed to tax gains on residential property sold within a specified period. If you sell a residential property within the brightline period, any profit is treated as taxable income and you must pay income tax on it at your marginal tax rate.
The brightline period has changed several times since its introduction in 2015. As of current rules, the period is two years for most residential property. There are important exemptions, including for your main home (the property you primarily live in), inherited property, and property transferred as part of a relationship property settlement.
The brightline test applies from the date you acquire the property (usually the date the sale and purchase agreement is signed, not the settlement date) to the date you dispose of it. The main home exemption has specific requirements — you must have used the property predominantly as your main home for the period you owned it.
Why It Matters for Due Diligence
If you're buying a property with any possibility of selling within the brightline period, understand the tax implications before you commit. The tax is on your profit at your marginal income tax rate, which could be up to 39% for high earners.
Also consider the brightline test when buying an investment property. Factor potential brightline tax into your investment calculations if there's any chance you might sell within the relevant period. Get specific tax advice from your accountant or tax adviser.
How to Check
Check the current brightline period with your accountant or on the IRD website. Your lawyer should make you aware of brightline implications at the time of purchase. If you're unsure whether an exemption applies, get professional tax advice before committing to a sale.
Frequently Asked Questions
Does the brightline test apply to my main home?
Generally no — there is a main home exemption. However, you must have used the property predominantly as your main home for the time you owned it. If you rented it out for a significant period, the exemption may not apply fully. Get tax advice for your specific situation.
How much tax will I pay under the brightline test?
The profit is taxed at your marginal income tax rate (ranging from 10.5% to 39% depending on your total income). For example, if your marginal rate is 33% and you make a $100,000 profit, you'd owe approximately $33,000 in tax.
Related Terms
Sale and Purchase Agreement
GlossaryThe legally binding contract between buyer and seller that sets out all the terms and conditions for a property transaction in New Zealand.
Settlement
GlossaryThe day ownership of a property officially transfers from the seller to the buyer and the purchase price is paid in full.
Capital Value (CV)
GlossaryThe council's assessed total value of a property, including both the land and all buildings or improvements, used primarily for calculating rates.
Rates
GlossaryAnnual property taxes charged by your local council to fund public services, infrastructure, and local government operations.
Mortgage
GlossaryA loan from a bank or lender secured against the property, giving the lender the right to sell the property if the borrower defaults on repayments.
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