20 April 2023

The Brightline Rules were introduced in 2015 to ensure property speculators were taxed on residential property, however, a concern with those rules is that they would inadvertently catch others who were not speculating on property. The unfortunate reality is, the Rules have caught many such transactions, an outcome which has only increased as the time period to which the Rules can apply has increased (now up to a 10-year test).

Those inadvertently caught include first home buyers (for instance when they have to wait too long to build due to timeframes for getting consent); changes in situations (such as loss of job, relocation, death and relationship breakups); and associated transfers (such as moving a property into a trust or winding up a trust). We have worked with many people that have been caught out by the bright-line rules when they sell their own homes which in many cases can seem unfair.

While many of these situations have not been addressed, the recent Tax Bill has introduced rollover relief that will assist some associated transfers. When these rules apply to a situation, Brightline tax should not be triggered on the transfer and the Brightline acquisition date should not be reset.

These rollover changes are limited in application, whereby they will only apply when the ultimate owner has not changed. For instance, they are not designed to allow for a parent to transfer property to their child to help them into the property market.

To achieve this, the rules are very specific and need to be worked through carefully on a case-by-case basis, especially when it comes to transfers into and out of trusts.

For example, in the situation of trusts, all trusts need to meet the requirements of a “rollover trust”. These rules have been clarified from the original version released previously. Further, the biggest change within the Tax Bill has been to allow trust property to be transferred to settlors, even if the settlor didn’t originally own the land. However, this requires the recipient to have been a principal settlor both at the time the property was acquired by the trust and at the time of transfer out of the trust. The principal settlor is a specific tax concept, not the person named as the settlor on the trust deed and needs to be reviewed at both points in time.

The Tax Bill also clarified transfers when there are changes in capacity, such as between Partners and a Partnership or between LTC owners and an LTC.

There is also recognition of the challenges that exist when multiple persons own a joint piece of land which is developed to build their own respective homes, and the land is later divided in half – in some cases this may no longer be captured by the Brightline rule. This was common in certain parts of the country where the land cost was so high that unrelated but friendly parties would buy land together and each build their own home.

The Tax Bill has also addressed some of the issues that have arisen when land is inherited.

All of these changes are positive and will certainly help in a number of situations, but they will by no means assist everyone who find themselves paying tax under the Brightline Rules.

Finally, it’s important to note that these changes will have an impact from an interest deductibility perspective too.

Find out how the recent changes to property tax rules can impact your short-term rentals and trusts in our upcoming webinar – register here. To speak to a tax specialist, contact our Tax Advisory team today.