What is the bright line tax regulations and how they may affect you

From the 1st October 2015, the new bright-line property rule says you'll pay tax when you buy and sell a residential property within two years, unless an exception applies.

Also, whenever you buy a property with the intention to resell it (even after the 2 years is up), you'll need to pay tax on any income you make when you sell that property.

The intention test says you must pay tax on property income if you originally bought a property with the intention to resell it. The intention test isn't a new rule. It's been around for a long time.

Only residential property is affected meaning that if you sell farmland or business property, the bright-line rule won't apply.

If a residential property was sold at a loss within two years (and no exceptions to the rule apply), these losses would be "ring-fenced". Meaning that if you owe income tax on another residential property sale in the future, you can subtract these "ring-fenced" property losses from the income you earned on this later sale. That means you'll pay less tax on the later sale

To be eligible for the main home exception to the bright line rule, you need to have used a property as your main home for 50% or more of the time that you've owned it. For example, if you use 40% of a property as your home and 60% as a rental property, you won't be eligible for the main home exception if you sell that property.

If you buy and sell your main home within two years, the bright-line rule won't apply. It's an exception to the bright-line rule. It means that you generally won't have to pay tax when you sell your main home. But you can only use the main home exception twice over any two-year period.

Residential properties held in trust can use the main home exception under the bright-line rule if the house sold was the main home of the principal settlor of the trust, or the principal settlor doesn't have a main home, and it was the main home of a beneficiary of the trust.

The bright-line rule does not apply if you sell a property you inherited or receive a property as part of a relationship settlement agreement.

Source

Shannon CorbettComment