CS Law Solicitor Riana Smith wrote an article for the Horowhenua Chronicle on the Bright-Line Property Rule
Rising house prices are making it tough for first-home buyers trying to enter the market. Banks and other advisers can sometimes suggest co-ownership with parents to enable the child to purchase a property. It is becoming more and more common for parents to help their children buy their first home. However, what comes as a surprise to parents is the potential tax bill which results.
Before you consider becoming a co-owner of a property with your child, parents should be aware of the bright-line rule.
The bright-line rule means that people who sell a residential property within the applicable bright-line period taxes income may need to pay income tax on any profit. The applicable period depends on when the property was acquired; the 5-year bright-line period applies if you acquired of the property between 29 March 2018 and 26 March 2021, and the 10-year bright-line period applies if you acquired the property on or after 27 March 2021 (please note that government has indicated “new builds” will be subject to the 5-year bright-line rule).
A common example is where parents co-own a property with their child as 50:50 owners. Four years later the child may decide to purchase their parent’s ½ interest in the property. This change in ownership structure is a disposal by the parents of a ½ interest in the land to their child and may result in tax consequences for the parents. The sale will be deemed to take place at the market value of the property at the time of disposal (even if the parents’ sell to their child below its market value) and could cause the parents to have income under the bright-line test.
The 10-year bright-line period will also restart again for the child.
The same consequences would arise if the parent’s ownership interest in the property is gradually bought out by the child, for example change to co-ownership from the parents and child as 50:50 shares to 75:25 shares. Here the parents have transferred part of their interest in the house. The increase in value would be income to the parents, if sold within the relevant bright-line period. The legal change to the co-ownership on the title will also result in the bright-line clock restarting for both the parents and the child.
In both instances, the parents would not benefit from the main home exemption offered, as although the property may be the child’s main home the parents would not be living there and the house is not their main home.
The tax rate applicable on the capital gain income could be up to 39%.
Examples like these highlight the need for parents to consider future transactions before becoming co-owners in property with their child. What may appear at first as a helping hand can result in onerous tax liabilities.
If you are planning on helping your child then we suggest that you obtain legal advice and specifically tax advice regarding the application of the bright-line rule.
Pro: Helping your child onto the property ladder
Con: Your tax liability