Getting bright line right
Richard asks:
(updated on Monday, April 15th 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 Experts Answer:
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).
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