On 31 August 2018, Inland Revenue released draft Question We’ve Been Asked (QWBA): “Income tax — bright-line test — main home exclusion — sale of subdivided section”. The draft QWBA explains when a section subdivided from a residential property sold within the bright-line period will be excluded from the bright-line test. The QWBA will be of interest to sellers seeking to rely on the main home exclusion.

The deadline for comment is 12 October 2018.

The bright-line test

The bright-line test taxes residential land sold within the bright-line period. The bright-line test applies to residential land that a person first acquired an interest in on or after 1 October 2015. The period of the bright-line test increased from two years to five years for residential land that a person first acquired an interest in, on or after 29 March 2018. The draft QWBA refers to the “bright-line period” which will be two years or five years, depending on when the seller first acquired an interest in the land.

Question

When is the sale of a section subdivided from a residential property sold within the bright-line period excluded from the bright-line test?

Answer

The sale is excluded when the main home exclusion applies.

The main home exclusion will apply when:

  • more than 50% of the area of the land in the subdivided section has been used for a dwelling that was the seller’s main home, and
  • the seller has used the land in the subdivided section in that manner for more than 50% of the time since the seller acquired the undivided land.

The main home exclusion is in s CB 16A(1) of the Income Tax Act 2007. In the QWBA, it is assumed that none of the other land rules in ss CB 6 to CB 12 apply to the sale of the subdivided land, eg s CB 6, which applies to the sale of land acquired for the purpose of re-sale. The bright-line test needs to be considered only where the sale is not taxed under any of the other land rules in ss CB 6 to CB 12. It is also assumed in the QWBA, for simplicity, that the property is not held in a trust.