Parents want to warn others about the tax trap with housing. Photo / Andrew Warner
Parents want to warn others about the tax trap with housing. Photo / Andrew Warner
Parents who helped their daughter buy a house say they have become unwitting victims of the Governments' brightline tax extension to discourage speculative house flippers.
The couple said they only took an equity stake so their daughter could afford to buy her home.
"My wife and I recently received theunwelcome news that we had been caught in the brightline test as a result of helping our daughter by having a 30 per cent share of her house which she bought after a relationship breakup," the father said.
Circumstances changed when the daughter got a promotion to move to another city.
That meant selling the house but the parents said they were shocked at what happened after that.
"The unwelcome news we received from our lawyer was that we would be caught by the brightline test because it was not our primary residence," the father said.
"We never saw the co-investment in her home as a pure investment. It was her primary residence and it never occurred to us we would be liable for tax," the man said.
The main reason to assist their daughter was to provide her with sufficient equity to get a loan.
"We never saw the money as an investment. Indeed the money less the tax has been reinvested as a loan in the new house so we won't be caught again.
"We recommend the loan approach to all parents looking to assist their children. Don't be caught like we were. There must be many parents caught or will be caught by the brightline test from helping out family. The unintended consequences of the tax are an expensive lesson," said the father, not wanting to be identified.
Co-investment or co-ownership was a model the Government is encouraging to get people into house ownership, the father said.
Andrew Bayly is worried about the brightline tax. Photo / Mark Mitchell
Andrew Bayly, National's revenue spokesperson and Robyn Walker, a Deloitte tax partner, have expressed concern about the brightline test which they say has unintended consequences.
Bayly said some people who had loaned their children money were being caught in the net and he doesn't think that's fair.
"If a parent goes 50/50 on a deposit with their child and then five years later the child buys out the parent's share, not only does the parent have to pay a capital gains tax on the increase in value, but the child's bright-line period resets to zero, and they would therefore have to hold on to the property for another 10 years, otherwise they will have to pay a capital gains tax when they sell it," Bayly said.
Hearing about this family's situation, Bayly said he had been approached by others where parents were caught out.
"I agree. This is a perfect example of the negative outcomes under the brightline test. Part of the inequity with how the brightline test is working is that if the investment had originally been provided as a loan, there would not have been a tax consequence for the parents as the property would have been 100 per cent owned by the child and the main home exemption would apply," she said.
"However, my understanding is that in many instances it isn't acceptable to a bank to give a mortgage to someone if they also have a significant debt owning elsewhere, for example the parents loaning funds for the property.
"However banking rules are not my area of expertise, that is just what I've been told by others (obviously this won't be an issue if the parents are in a position to provide sufficient lending that a third party mortgage isn't required," Walker said.
An Inland Revenue spokesperson said when a part share in a property is disposed of, that share could be subject to tax under the brightline test.
"Where there is a change in proportions of ownership, as currently drafted, the rules would result in the brightline clock resetting for both parties. This resetting of the clock is not the policy intent and we intend to advise that the legislation be amended to clarify this," the spokesperson said.
"The policy intent is that the clock should reset only for the newly acquired share. For example, if the ownership went from 50:50 to 25:75, the intention is that the clock should reset only for the 25 per cent share transferred," she said.
