Getting bright line right
Question from Richard updated on 15th April 2019:
I have owned a house for about four years. Over that time, I purchased a new house and having been using the old house as a rental for a year now. I'm looking to move the old house into a company which will be a change in ownership.
My accountant says that by changing the purpose of the old house from residential to rental a year ago, it is counted as a sale for bright line purposes (and therefore I've now only owned it for a year). Another accountant I've talked to, however, disagrees with this opinion and says it's only a sale when registered with LINZ. Which one is correct?
Our expert Matthew Gilligan responded:
Firstly, merely changing the use of a property does not represent a sale as far as the bright-line rule is concerned. Secondly, if you have owned this property for four years, then any sale either into an associated company or to a third party will not be subject to the bright-line rule. I would be surprised if your accountant said that the change of use triggers a sale as far as the bright-line rule is concerned.
Perhaps they meant the proposed transfer of the property into your rental company will trigger a new acquisition under bright-line rules. This is an important point that you should take note of. Although there may be advantages in moving this rental property into the company, doing so does trigger a restart of the bright-line “clock”, which now runs for five years.
This means that should you move the property to the company and then decide you want to sell it to a third party within five years, any gain that arises in the company will be subject to tax under the bright-line rule.
Accordingly, you need to tread carefully when moving a property into new ownership and think about what your long-term plans are for that property. Note also that the bright-line rule is not the only land tax provision that can apply - there is a raft of others that can cause you to have a tax liability when restructuring.
You should seek advice before committing to this transaction (ideally from an accountant who is not only well-versed with the bright-line rule, but also the rest of the land tax provisions).
Matthew heads GRA's specialist property and asset planning division. He helps clients create optimal tax structures and build wealth through property. He has an extensive buy-to-hold property portfolio, is currently involved in over a dozen developments, and is author of two books - Property 101 and Tax Structures 101.