Property Ownership – New Brightline and Rollover Relief Rules
On 1 July 2024 some important legislative reforms around property ownership came into effect. These include:
- The re-introduction of the two-year brightline test;
- Development of the rollover relief rules;
- Clarification around eligibility to the main home exclusion where rollover relief has applied; and
- The reinstatement of interest deductibility.
- Brightline Test
The brightline period is now two years, marking a considerable change from the previous ten-year test. This has the effect of applying retrospectively to all Agreements for Sale and Purchase of Real Estate entered into on or after 1 July 2024.
The brightline test determines whether tax is payable upon the sale of residential property. The default position is that if a property is sold within the brightline period then tax will be payable on any capital gain that applies to that sale (subject to certain exclusions and rollover relief).
- Exclusions and Rollover Relief
Certain property sales may be excluded from incurring capital gains tax obligations, or rollover relief may apply in specific scenarios. For instance, main homes (see 3 below), farm land, and commercial properties are generally excluded from incurring tax obligations for bright-line purposes.
When property is disposed of and rollover relief applies, the bright-line test looks at how long the transferor (i.e. original owner) and the transferee (new owner) held the property for collectively. The transferee is treated as having acquired the property at the same price that the transferor, and the transferor is not taxed on the transfer to the transferee.
Under the new rules, rollover relief applies where property is transferred:
- From an individual to a trust (subject to certain criteria being met);
- From a trust to its settlor where the trust originally settled the purchase; and
- Between “associated persons” as defined in sections YB2 -13 of the Income Tax Act.
These are in addition to the old rules, which include property transferred:
- As part of a relationship property settlement (although a binding relationship property agreement must be entered into for this to apply);
- Under an inheritance; and
- From a trust to its settlor if the settlor originally settled the purchase.
Rollover relief can only be relied on for a property transfer once in a two-year period.
- Main Home Exclusion
The main home exclusion applies where an owner has lived in their property for more than half of the two-year period immediately preceding its sale, and has occupied more than 50% of the total area of the property during that period.
When rollover relief is involved, the time spent in the home by the transferor is attributed to the transferee. For example, if trustees of a trust own a property for 8 months and then transfer it to the trust’s settlor who owns it for 6 months, the total time considered for the main home exclusion is 14 months, meaning the settlor would qualify for the main home exclusion upon its sale.
- Interest Deductibility
Interest deductibility is in the process of being fully restored. From 1 April 2024 – 31 March 2025 landlords can deduct 80% of the interest incurred on loans to offset tax payable on rental income. From 1 April 2025 this increases to 100%.
If property is sold within the brightline period and is subject to tax, vendors may now be able to claim the amount of interest that was previously denied under the interest limitations rules as an expense to be offset against tax payable on the gain. The amount to be claimed as an expense is limited to the gain made on that sale, however disallowed deductions in excess of the gain can be carried forward to offset future losses (subject to loss ring fencing rules).
The information in this article is general in nature and may vary depending on your specific circumstances. Please ensure that legal and tax advice is obtained accordingly.
Chloe Wilson
Senior Solicitor
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