What are the changes to the Brightline test, and what will they mean?

Let’s start with a quick review of what the Brightline test is. The Brightline test requires that a tax is paid on the profits from selling a house in NZ, as long as that property is sold within a specific time frame.

This test is the closest thing that Aotearoa has to a capital gains tax, but it’s far more limited than the capital gains taxes that exist in other countries like Australia and the UK.

The obvious next question is, what is a capital gains tax? This is actually pretty simple to understand: a capital gains tax is just a tax you pay when you sell an asset. Generally speaking, it’s talked about in relation to property, but can actually apply to all sorts of assets – think cars, art and stocks, for example.

The changes announced by the new government are to do with the time frame in which the Brightline test applies.

The Brightline test was first introduced in October 2015 and, at this point, it only applied to property bought and sold within two years of acquisition (although certain exemptions applied).

Under the last Labour government, the Brightline test rules were expanded. As a result, the Brightline test period is currently set at 10 years for properties bought since March 27, 2021, or five years if the property is a new build or was acquired between March 29th, 2018 and March 26th 2021. The former government expanded the time period to make things easier for first home buyers, by increasing the number of properties that would be taxed if they were being flipped by property investors.

The coalition Government, made up of the National, ACT and NZ First parties, plans to restore the Brightline test back to the original two year period. The changes to the Brightline test will come into force from July 1, 2024, meaning that properties sold on or after this date will only be subject to the Brightline rule if the property is sold within two years of it being acquired.

Properties acquired before July 2022 will be exempt from the Brightline test under the changes, as the sales of these homes will have occurred over two years ago.

There are a few general exclusions to the Brightline test, and we haven’t seen reporting that these are subject to change. These include:

• Properties that are your main home
• Farmland and businesses premises
• Inherited property, or if you’re the executor or administrator of a deceased estate
• Properties impacted by Cyclones Hale and Gabrielle in early 2023.

We spoke to two experts on the NZ property market about what the above changes will mean for those looking to buy or sell homes in NZ.

Ed McKnight is the Resident Economist at Opes Partners, a property investment company dedicated to helping Kiwi become property investors. Nick Goodall is the Head of Research at CoreLogic which amasses heaps of data on NZ’s property market to help inform those making property-related decisions. Here’s what they had to say.

The headline message from Ed and Nick is that buyers and sellers should expect more properties to come onto the market as a result of the changes to the Brightline test.

Ed estimates that somewhere between 75,000 – 100,000 properties that would have been subject to this capital gains tax will now not be affected due to the change. However, he stresses that this doesn’t mean that all of these will suddenly flood into the market after July 1.

Nick predicts that the increase in properties on the market will be due to investors who are finding it tough to service their mortgage, given high interest rates and mortgage payments over the last couple of years.

Due to the higher volumes of homes for sale, there will be a continuation of the current stagnation in property prices through to the latter half of 2024, says Ed. Although Nick notes that there will likely be increased competition from investors for properties, the “net result is probably higher numbers of listings outweighing any boost to demand, meaning less upward pressure on prices, or more downward pressure.”

And what will it all mean for buyers and sellers?

We’re already in a buyer's market, says Ed, and this looks set to continue: “For buyers, the changes will mean more properties are available, and that the number of days to sell a property will increase. This gives buyers a bit more negotiating power, and means they can take their time to find a home that specifically suits their needs.”

Of course, this means the opposite for sellers. As Ed says, “it will probably take a bit time for properties to sell, and vendors might need to negotiate more and perhaps drop some price expectations.”

The core message from both experts is that first home buyers should continue to trust their instincts and not be overly swayed by the upcoming changes to the Brightline test.

“There will probably not be much real impact in the grand scheme of things, for this cohort, except potentially a minor lift in competition from investors," says Nick.

Ed’s take home message for first home buyers is to actively engage with the market and be out there looking. "But I’d also be aware that we might see more listings in July”, he says.

First home buyers shouldn’t overthink decisions and unnecessarily delay, he stresses: “If you’re out there looking on Trade Me Property and see a home that’s a good price and that will suit your family, go for it. However, if you can’t find exactly what you want right now, then maybe waiting until July isn’t the worst idea in the world.”

However, while July will likely bring more listings, Ed doesn’t foresee huge changes to NZ property prices: “There will be more choice in July, and perhaps, at a national level prices, might come down by a percent or two, but this probably won’t be really noticeable in terms of a cheaper price.”

The group most obviously impacted by the changes to the Brightline test are property investors.

Nick predicts that demand will likely increase as investors are less concerned about their circumstances changing over the 2 – 10 year horizon, and that investors who’ve felt the pinch with increasing interest and mortgage rates will likely be those looking to sell.

Ed agrees that the subset of investors most keen to sell will be those who bought at lower interest rates and are now suffering with higher interest rates.

However, investors should avoid jumping the gun, he cautions, “it’s all about determining when the IRD will decide that a property has been sold. We (Opes Partners) are telling people, ‘don’t put your property under contract until July 1st.’ The Brightline clock stops when you go under contract, so you don’t want to go under contract at the moment.”

Because of this, Ed suggests investors don’t list their properties yet, as “you don’t want to list your property, do some open homes and then not be able to take or entertain offers until July 1st.”

Instead, he recommends investors planning to list their properties come July use this time to get ready. “The first thing I’d do is any required maintenance. Go through the property, maybe even do a building inspection to deal with any issues before buyers come through.”

He also recommends starting to talk to a real estate agent now, and (if applicable) giving tenants notice so it’s possible to sell with vacant possession.

Both experts reference the fact that the current NZ property market has seen downwards pressure on house prices, and Ed says that some of the pain for sellers is likely to continue in the months ahead.

His advice is for sellers to “get really clear on what they are after.” For example, are you most concerned about the price or selling quickly?

Ed tells us that real estate agents are struggling to get sellers to be realistic about the price they’re likely to get for their home in the current market. In other words, it’s important for sellers to manage their expectations.

He says that sellers should ask themselves, “are you happy to wait on the market to get that good price?”. If you are, Ed suggests thinking about even taking the property off the market and waiting for a year or so for some recovery, and tells us that some are already doing this.

If you're keen to sell ASAP, you’ll probably be more open to negotiation and spending a little longer on the market, he warns. Ultimately, it comes down to this question, “Do you want to meet the market and complete your sale? Or do you want to wait for that premium?”.