Things look set to get a little brighter for some Kiwis looking to sell their investment property, with the government’s changes to the bright-line test due to come into effect next month.

Under the rules, sellers are required to pay income tax on any profits made from the sale of residential properties that don’t qualify as their main home. Currently, those who sell existing property within 10 years, and new builds within five are taxed.

But after July 1, all property will fall under a two-year test. This means that from then onwards, people who sell residential investment property within two years of buying will have to pay tax on any gains, and equally someone who on-sold a property they bought after two years won’t be taxed.

With many expecting the already saturated market to be further flooded with new listings, Bayleys head of insights, data and consulting Chris Farhi is anticipating a more muted response.

“If people have the perception that there's heaps of stock on the market, then they'll just defer selling, unless they're in a dire situation around something like interest rates.”

“I think those people who choose to sell would probably have already been looking at selling and are less concerned about the tax on any capital gain. They’re probably more concerned about just recapitalising.”

Farhi says an oversupply of listings and a softening of prices is likely to leave many with little to gain.

“The properties that will benefit most from the changes will be ones that were perhaps bought between five to 10 years ago. Whereas properties that were bought in 2021 and sold now wouldn’t necessarily have any capital gain.”

“The type of people who are going to be subjected to this test are property investors, and they’re typically pretty smart around the money. So, if they perceive that there’s a weakening of the market, unless they've got some distress or some pressure on them, they'll just push out a transaction longer.”

Meaning there’s unlikely to be an avalanche of new listings on July 1.

“You'd need to have the situation of someone who bought about seven or eight years ago, who's sitting on a very large capital gain and wants to cash up … and they want to cash up quickly, and they’re delaying this until July”

But that’s not to say there won’t be some people in that camp.

“There could be some properties, maybe holiday homes that could very well be captured by this. Meaning listings could pick up in some of those areas.”

SO WHAT DO YOU NEED TO QUALIFY?

If you are in a situation where the two year bright-line rules may apply, and for you, it’s a good time to sell - here’s what you need to know.

The two year period commences on the date the title was transferred to the vendor, this is the date shown on the record of title for the property. The date the vendor sells the property is the date a sale and purchase agreement is signed - even if the sale is conditional on finance or a building report.

To be exempt from the tax you need:

• The sale and purchase agreement needs to be signed on or after July 1 2024.
• A full two years must have lapsed between the date the property was transferred to the vendor, as shown on the record of title, and the date the sale and purchase agreement to sell the property was signed by both parties.

There are a number of other things to consider as well, and vendors looking to take advantage of the new rule are encouraged to seek advice from an accountant as normal taxation rules may still apply.

• If you bought the property with the intention of selling it
• If you haven’t been living in the property as your main home
• If you have a pattern of buying or selling
• If you’re in the business of property dealing, developing or building and the property was bought for that business.