Main home exemption – who does it really apply to?
17 August 2022
When the bright-line test was introduced in 2015 its purpose was to combat property speculation where speculators weren’t paying tax under the existing tax rules when many thought they should. While largely successful in this regard, the rule was not supposed to catch out long term property investors or property that was the family home.
Unfortunately, the reality tells a different story.
When the bright-line rules were introduced, Prime Minister John Key stated:
“These measures will not affect New Zealanders’ main home, although existing tax rules will still apply in addition to these new steps… They are aimed squarely at ensuring that property buyers – including overseas speculators - who buy residential property with the intention of selling for a gain pay their fair share of tax as required by the law. It’s not unreasonable to expect that if you buy an investment property and sell it for a gain within two years, then you should be taxed on that gain. This is quite different to an investor buying with a long-term view of renting their property to tenants. And it’s completely different to New Zealand owner-occupiers who have worked hard to buy their family home.”
Unfortunately, many of those who were not the intended focus of the bright-line rule have for a variety of reasons found themselves caught inadvertently with little recourse, despite the purpose to not tax them.
This has worsened with the extension of the bright-line rule from originally a two-year rule, to now being largely a 10-year rule. The rule is for all intents and purposes a capital gains tax.
In this respect, the rule marks a significant departure from the prior tax rules regarding property transactions in New Zealand. The pre-existing intention rule was considered by Revenue to be difficult to enforce due to its subjectivity, so the bright-line rule was introduced to resolve that issue by “supplementing the intention test with an unambiguous objective test”.
A big reason why the bright-line rule is catching out the unintended is the non-application of the “main home” exemption. As the main home exemption and the bright-line rules have been developed and extended, the outcome for many homeowners has changed from the original intention of the rule.
Not only was the main home exemption more limited than the earlier exemption, for many their circumstances have changed resulting in the sale or transfer of property that was not expected. For instance, COVID stopped travellers and businesses in their tracks. People lost their jobs or income. The cost of building has soared, and interest rates have climbed. None of those “changes in circumstance” matter when looking at the main home exemption. It does not matter why you have sold your house. It does not matter why you couldn’t afford to build. All that matters is if you have lived in the home as your home for long enough. This has been especially pertinent in the case of bare land which was acquired with the intent to build a family home. It is typically outside the exemption because it cannot be used as a main home.
Therefore, despite the rhetoric that the bright-line rule only taxes those who are speculating in property, the reality is much different. We are seeing more and more people who are being told they have to pay tax on the sale of their home or the land they bought to build their home on. People cannot believe that they not only have to sell their home, but that they lose part of the hard-earned equity to tax.
Perhaps the most egregious cases have been those who have had to sell their property due to unexpected changes in their lives, who now have to pay tax on the proceeds, regardless of whether or not they purchased the property with the intention of selling it. It was supposed to acknowledge that people do not usually have an intention to sell their home within a short period of time. It does not.
Some people are being taxed because they had to move out of an area, and the home is rented until it can be sold. Others have suffered personal tragedy, such as the loss of a job or a family member, and no longer can or want to live in the house. Depending on timeframes of ownership and use, these can be subject to tax under the bright-line test.
Understandably, many are confused because they were told they wouldn’t be taxed because it was their family home or was intended to be their family home. The reality is that the rule provides for no subjectivity and no discretion available not to apply it.
The key for homeowners is to understand the rules when making wider decisions. It is possible, for some, to plan for this. Once you have sold though it is usually too late. If you can, get tax advice when you buy and if your plans change.
And definitely get tax advice before you sell.
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