In 2015, the Tax Department introduced a ‘bright-line test’ for the sale of residential property. If you buy and sell a property within two years, this test is used to determine if you are required to pay tax on the profit. We explain how the bright-line test works and the responsibilities of residential property owners.
The bright-line test was introduced to supplement the intention test. The intention test determines taxability based on the original intention at the time of acquiring the property later sold. For example, if you bought a property with the intention of keeping it, but then had to sell it quickly due to unforeseen circumstances, under the intention test any gain you made on the sale would be unlikely to be taxable (because your original intention did not involve resale).
The intention test is subjective and therefore time consuming and difficult to enforce. The two year bright-line test is, by contrast, unambiguous and objective. If you sell a property within two years of purchase, you will need to pay tax – with just a few notable exceptions.
Bright-line test exceptions: Family home
You may be eligible for a ‘main home exclusion’ from the bright-line test if the property in question was your main place of residence for over half the time that you owned it. If you own two properties, only one is able to qualify as your ‘main’ home. Over half of the property also needs to count as your ‘main home’, including spaces such as garages, gardens and tennis courts.
Please note: this exception does not apply if you have a history of buying and selling properties. The maximum number of times you can use the main home exclusion is twice in two years.
What is the bright line test?
Below are some key rules and features to keep in mind:
- Two-year start date. The start of the bright-line period usually begins from the date that the property title has been put under your name. However, there are different rules for different types of acquisitions for instance purchasing an apartment in a unfinished apartment building.
- Two-year finish date. The bright-line period ends when the seller enters into a contract/agreement to sell the property. However, there are different end date rules for gifting, mortgagee sales and compulsory acquisitions.
- Residential land. The bright-line test was developed for residential land only; it does not apply to business premises, farmland or other commercial land.
- Trusts. Properties held in trusts may be eligible for the main home exclusion (see above). However, these properties must meet certain requirements to prevent people taking advantage of this rule for multiple properties.
- Inheritance. If you inherit property, the inheritance transaction is exempt from the bright-line test. However, it may be subject to other taxes in the future.
What are my responsibilities?
The most important thing is to be aware of the bright-line test so you aren’t caught out by surprise. Furthermore, you are likely to be required to file a residential land withholding tax (RLWT) declaration.
If you have questions about the bright-line test, then it’s recommended to seek advice from a tax specialist, not just a lawyer. Most lawyers do not have the specialist tax knowledge or practical experience required to fully understand this new test and its implications.
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