Thinking of subdividing your land and selling a section? It might seem like a straightforward process, but from a tax point of view, things can get complicated quickly. If you sell a residential property or even just part of it within a certain time frame, you may need to pay tax on any profit under the bright-line test.
This rule doesn’t only apply to investors. Even everyday homeowners who subdivide and sell part of their property can get caught out. In this guide, we’ll explain how the bright-line test works, what dates matter, how it applies to subdivisions, and what exemptions or relief might be available.
Let’s break it down so you can make informed decisions and avoid any unexpected tax bills.
What Is the Bright-Line Test?
The bright-line test is a tax rule that applies when you sell residential property in New Zealand within a specific period after buying it. If you sell within this timeframe and do not qualify for an exclusion, the profit on sale is treated as taxable income.
Originally introduced to target property speculators, the test has evolved to cover a wider range of situations. That includes homeowners who subdivide their land.
Here’s how the bright-line period works, depending on when the property is sold:
| Sale Date | Bright-Line Period |
|---|---|
| On or after 1 July 2024 | 2 years |
| 27 March 2021 to 30 June 2024 | 10 years (or 5 years for qualifying new builds) |
| 29 March 2018 to 26 March 2021 | 5 years |
| Before 29 March 2018 | Not subject to the bright-line test |
If you bought a property after 1 July 2024 and sell it within 2 years, tax may apply unless an exclusion or rollover relief is available.
This rule also applies to residential property located overseas, if you are a New Zealand tax resident.
In the next section, we’ll look specifically at what happens when you subdivide land and how that might trigger the bright-line test.
Does the Bright-Line Test Apply to Subdivisions?
Yes, it absolutely can. Subdividing land does not protect you from the bright-line test. If you subdivide a residential property and then sell one or more of the new lots, the sale may trigger a taxable event under the bright-line rules.
This often surprises people who weren’t planning to sell at the time they bought the property. But under the bright-line test, the intention at purchase doesn’t matter as much as when you sell and how the property has been used.
Let’s take a common example. You buy a large section with a house on it, live there for a few years, then subdivide and sell the back half. Even if you keep the house and continue living in it, the sale of the new lot may be taxable if it happens within the bright-line period.
The IRD sees that new section as part of the original residential property, so the date you acquired the undivided land is what counts. The bright-line period starts from the day your name was registered on the title with Land Information New Zealand (LINZ) — usually the settlement date.
And here’s an important detail: the bright-line period doesn’t reset when you subdivide. It’s still based on when you first acquired the full property.
Quick Facts
- Selling one or more subdivided lots within the bright-line period can be taxable
- The start date is based on when you acquired the full, undivided land
- The end date is when you enter into a binding agreement to sell the new lot
- Even partial sales may trigger tax unless exclusions apply
In short, if you’re planning to subdivide and sell, it’s critical to understand whether the bright-line test applies — because the timing could cost you.
Up next, we’ll look at the key factors that determine if tax is due when you sell a subdivided property.
Key Factors That Determine Tax on Subdivided Land
Not every subdivision will result in a tax bill under the bright-line test, but several factors determine whether tax applies. Understanding these elements can help you plan better, avoid surprises, and make smart decisions when it comes time to sell.
Date You Acquired the Land
This is the starting point. The bright-line period begins on the day your name was registered on the title of the undivided property. Even if you subdivide later, the clock started ticking the day you acquired the original section.
Example: You bought a large property in March 2023. In 2025, you subdivide it and sell one of the new sections. Even though the lot is new, the bright-line test applies because it’s still within the 2-year period starting from March 2023.
Use of the Property
Was the land your main home, a rental, or bare land? The IRD looks at how the property was used. If the property qualifies as your main home, and you meet the 50% use and time test, you may be able to claim the main home exclusion — but this only applies to the part of the land you actually used as your home.
Selling a newly created section at the back of your property, even while you stay in the house, may not qualify for this exclusion.
Intention and Activity
Your original intention when buying the land doesn’t exempt you from tax, but it still matters under other tax rules. If you intended to build and sell from the beginning, the profit could also be taxed under different provisions like CB 12, CB 13, or CB 14. However, for the bright-line test specifically, the key question is whether the sale happened within the applicable time window.
Also, if you’re working with builders, developers, or related parties, these associations may bring additional tax rules into play.
When You Sold the Subdivided Lot
Timing is everything. The bright-line end date is the day you entered into a binding agreement to sell the new lot. If that happens within 2 years of your original acquisition date (after 1 July 2024), the sale will likely be taxed — unless you qualify for an exemption.
Tip: Even if settlement happens outside the bright-line window, the sale is still caught if the contract was signed earlier.
Whether Rollover Relief Applies
In some cases, you might qualify for rollover relief, which means the bright-line period and tax treatment are passed from one owner to another. This often applies to changes in ownership between trusts, relatives, or relationship property settlements — but it’s subject to strict conditions.
If you’re transferring the land between associated entities before the sale, make sure to check whether rollover relief applies, and whether it resets the bright-line period.
Exemptions to the Bright-Line Rule in a Subdivision Context
Even if your sale happens within the bright-line period, you might not have to pay tax — if you qualify for an exemption. The most common one is the main home exclusion, but there are others that apply in special situations such as inheritance, rollover relief, or farmland use.
Let’s unpack what each of these means, especially when you’re dealing with subdivided land.
Main Home Exclusion
If you lived on the property and used more than 50% of the land as your main home for more than 50% of the bright-line period, you may not have to pay tax on the sale. Sounds simple, but here’s where it gets tricky with subdivisions.
If you sell only part of the property — for example, the back section — that portion might not qualify for the exclusion if it wasn’t part of your main home.
Example: You lived in the front house and sold a new section created at the back. Since the back section was never used as your residence, the IRD will likely treat the profit as taxable.
To claim the exclusion, both of the following must be true:
- You used more than 50% of the land area (including garden and garage) as your main home
- You lived there as your main home for more than 50% of the bright-line period
If either one is 50% or less, the exclusion does not apply.
Partial Use and Mixed-Use Scenarios
If you rented part of your land or used some for business (like a home office or Airbnb), you may only get a partial exclusion, or none at all. This is similar to situations where you’re claiming GST on residential property expenses.
Rollover Relief
This applies when a property is transferred between certain family trusts, partners in a relationship, or associated persons. If rollover relief applies, the bright-line period is inherited from the previous owner, and the tax is deferred — but not avoided.
Example: You transfer a property into a family trust and sell it 6 months later. If rollover relief applied, the bright-line clock would include the period before the transfer. If you still fall within the 2-year window, tax may apply unless the property qualifies for the main home exclusion.
Inherited Property
If you inherited the land, the bright-line test doesn’t apply when it is transferred to you or when you sell it — assuming you are not selling for commercial development purposes. This is a clear-cut exemption.
Farmland and Business Use
If the land has been used predominantly for farming or as business premises, the bright-line test won’t apply. But this exemption is rarely relevant in residential subdivisions and must meet strict IRD definitions.
What Happens if You Sell Only One Lot After Subdividing?
A lot of people assume that if they only sell one section after subdividing, they’ll avoid tax. Unfortunately, that’s not how the bright-line test works.
Even if you keep most of the land and only sell one new lot, that single sale may still be taxable if it falls within the bright-line period and no valid exclusion applies.
Why It’s Still Taxable
From the IRD’s point of view, the property you bought is the entire undivided parcel. When you subdivide and sell just one part of it, you’re still disposing of residential land — and that can trigger the bright-line test.
It doesn’t matter how many lots you sell or keep. What matters is:
- When you acquired the land
- When you entered into the sale agreement
- Whether you meet the criteria for any exemption (like the main home exclusion)
Example: You bought a lifestyle block in August 2023. In 2025, you subdivide it into two lots. You keep the front section with the house and sell the back lot. That sale is still within the 2-year bright-line period and will likely be taxable — even though it’s just one lot and you still live in the house.
What About Minor Sales?
There’s no exemption just because the sale was small or the lot is undeveloped. The bright-line test applies equally whether the land is bare or has a house on it. The only way to avoid tax is by meeting the criteria for an exclusion, or selling after the bright-line period has passed.
What Should You Do Before Subdividing or Selling?
Before you take any steps to subdivide or sell, it’s important to pause and assess the tax implications. The bright-line test can easily catch out owners who didn’t realise they were doing anything taxable. Here’s a checklist of what you should do before moving forward.
Talk to a Property Accountant or Tax Advisor
This should be your first move. A property accountant can help you:
- Work out if your sale is subject to the bright-line test
- Assess whether exemptions like the main home exclusion apply
- Understand if other land sale rules or rollover relief could affect your situation (see our guide on provisional tax obligations)
Many tax mistakes happen because people assume the rules won’t apply to them. Getting tailored advice up front can save you thousands in unexpected tax bills.
Confirm Your Dates
Figure out your:
- Bright-line start date (usually the settlement date of the undivided land)
- Bright-line end date (the date you sign the sale agreement)
If you’re within the relevant bright-line window (2, 5, or 10 years depending on when you acquired the property), there’s a good chance tax could apply.Keep Good Records
If you’re relying on an exclusion like the main home exemption, you’ll need to prove how the property was used. Keep records of:
- Your occupancy
- The area used as your home vs any rented or undeveloped sections
- The timeframes of subdivision, construction, and sale
IRD often looks at the whole picture — not just what you declare — so having proper documentation is key.
Understand the Risks of DIY Decisions
Making decisions based on online forums or casual advice from friends can backfire. Tax law around subdivisions is technical and often misunderstood. Don’t guess. The cost of getting it wrong can be significant.
Tip: Use the IRD’s Property Tax Decision Tool to help you assess if your sale is likely to be taxable. But use it as a starting point, not a replacement for advice.
Don’t Rush the Sale
If you’re close to the end of your bright-line period, it may be worth delaying the sale — especially if no other tax rules apply. Just make sure you’re not triggering other issues by waiting, like changes in property value or development deadlines.
Next Step: If you’re planning to subdivide and sell, or you’re unsure whether your situation is taxable, BH Accounting can connect you with a trusted tax professional who understands the bright-line test inside and out.
Final Thoughts
Subdividing and selling property in New Zealand isn’t just a land deal. It’s a tax event — and the bright-line test could apply even if you’re only selling part of your backyard.
The key takeaway? Timing and usage matter. Whether you’re living on the property, selling to a relative, or transferring it to a trust, the IRD will look closely at your timeline and how the land was used. And even if you think you’re safe, other land sale rules may still apply.
So don’t leave it to chance. Before you move forward with a subdivision or sign a sale agreement, take the time to check your dates, understand your exemptions, and get the right advice.
Need help? BH Accounting is here to make things simple. We’ll connect you with a trusted property tax expert who can walk you through your options and help you stay compliant.
Get clarity now — your future self (and your bank account) will thank you.