Bright-line deductible costs: what you can subtract from the gain

A bright-line gain is taxed on the net profit: the sale price less the cost of the property, which Inland Revenue says includes the purchase price, purchase costs such as legal and valuation fees, capital improvements, and selling costs such as agent commission. Holding costs (interest, rates, insurance, repairs) are different. For a rental you usually claim them against the rent each year. For a property that earns no income, they only count from the day you sign the sale agreement to settlement. In our worked example below, careful records take the taxable gain from $110,000 to $46,580. Rules checked 10 November 2026.

The net profit formula

Inland Revenue's guide IR1229 (March 2026, pages 42 to 44) sets out what makes up the cost of a property sold under the bright-line test. Put together, the calculation is:

Net profit = sale price less (purchase price + purchase costs + capital improvements + selling costs) less deductible holding costs

The cost of the property is deducted at the time of sale, not in the years you owned it. That matters because it means you can add up costs from several years and take them all off in the year the sale is taxed. Which year that is depends on settlement, not the sale agreement; our guide to how the gain is taxed covers that.

One rule runs through everything: you cannot deduct anything you have already deducted. If a cost has been claimed against rental income, it does not come off the gain a second time.

Before any of this matters, the sale has to be caught. For sale agreements signed on or after 1 July 2024, that means the agreement was signed within 2 years of the date title transferred to you, and no exclusion such as the main home exclusion applies. The is my gain taxable checker and the bright-line test explained guide cover that first step.

What counts, cost by cost

Purchase costs

IR1229 lists lawyers, valuers, surveyors and real estate agents as purchase costs. Keep the settlement statement from your lawyer, because it is usually the cleanest record of what you paid and when.

Capital improvements versus repairs

The line between a capital improvement and a repair is the one that most often trips people up. An improvement adds something new or changes the character of the property: IRD's own example is a new deck. A repair puts back what was already there, such as fixing a fence. Improvements form part of the cost of the property and come off the gain. Repairs are a holding cost, and follow the holding cost rules below. So on a property earning no income, a repair done well before the sale is usually not deductible at all.

Selling costs

Agent commission is often the largest single deduction after the purchase price. Add the lawyer's fees on the sale, and any other cost directly of selling.

Holding costs: when they count

Holding costs are the costs of owning the property while you have it: mortgage interest, rates, insurance, and repairs and maintenance. IR1229 says they are deductible only if they meet the general deduction rules, and that "Personal expenses are not deductible." What that means in practice depends on how the property was used.

A rental

If the property was rented out, holding costs are usually deducted against the rental income in the year you incur them. You do not claim them again against the gain. Since 1 April 2025, interest on residential rentals is fully deductible again; it was 80% for 2024/25. Rental deductions are themselves ring-fenced, which our selling a rental guide and ring-fenced losses guide explain.

A property earning no income

If the property was empty, held as a bare section, or was a home that does not qualify for the main home exclusion, holding costs are deductible only from the date you enter the binding sale agreement (when the sale becomes certain to be taxable) to settlement. IRD is direct about it: "Any interest expenditure prior to the date of the agreement to sell the property is not deductible."

IRD's worked example in IR1229 (pages 43 to 44) is Debbie and Mike, who bought a property for $800,000, left it vacant and sold it for $1,000,000 within the bright-line period. They could deduct a $20,000 deck as a capital improvement, plus $1,600 of interest and $400 of rates and insurance for the 4 weeks from the sale agreement to settlement. A $1,000 fence repair before the sale agreement was not deductible. That gives a net profit of $178,000.

Private use

Costs of living in the house are private and never come off the gain. If a property you lived in turns out to be taxable, for example because you lived there for less than half the bright-line period, the interest you paid while living there is still private.

Worked example: a vacant house sold within 2 years

Sam buys a house to do up. Title transfers on 14 March 2025. Sam pays $750,000, plus $2,500 in legal fees and $800 for a building report. Sam spends $30,000 on a new kitchen, never lives there and never rents it. On 1 September 2026, Sam signs an agreement to sell for $860,000, with settlement on 13 October 2026. The agent charges $24,000 and the lawyer $1,800. Interest, rates and insurance run at $720 a week.

The sale agreement is within 2 years of 14 March 2025, so the gain is caught. Here is the calculation, run through this site's engine with 2026/27 rates:

Settlement on 13 October 2026 puts the gain in the 2026/27 income year. Sam's other income is $85,000, so the whole gain falls in the 33% bracket. The extra income tax is $15,371.40.

Had Sam simply taken the purchase price off the sale price, the gain would have been $110,000 and the extra tax $37,200.00. The deductions are worth $21,828.60 in tax here, which is why the paperwork matters.

Two things Sam cannot claim. The interest, rates and insurance from March 2025 to August 2026 were incurred before the sale agreement on a property earning no income, so they are not deductible. And if Sam had repainted rather than replaced the kitchen, that repair would have been a holding cost, not deductible either.

The same sale as a rental

If Sam had rented the house out, the holding costs would have been claimed against the rent each year instead, and none would come off the gain. The engine then gives a net profit of $50,900 and extra tax on the gain of $16,797.00. That looks worse, but the holding costs have already reduced tax on the rent (subject to the rental ring-fencing rules), so the two results are not directly comparable.

To run your own numbers, use the bright-line tax calculator; it applies the same holding cost rule automatically.

Other points: co-owners, depreciation and GST

• Co-owners. The net profit for the whole property is worked out first, then multiplied by each owner's share (IR833 boxes 10 to 12). If a co-owner lived there as their main home, only the other owner's share may be taxed.
• Depreciation recovery. If you claimed depreciation on an asset that is sold with the property for more than its adjusted tax value, the difference is income (IR1229 p44). That is separate from the bright-line gain.
• Losses. If your costs are more than the sale price, you have a bright-line loss. It does not go in your return and cannot reduce salary or rental income; see our ring-fenced losses guide.
• Inherited or rollover property. If rollover relief applied when you received the property, you take over the previous owner's cost. Our rollover relief guide explains.

Records to keep

IR1229 says you must keep records to support what you claim. For costs, that means:

1. The sale and purchase agreements and settlement statements, for both the purchase and the sale.
2. Invoices for improvements, with dates, so you can show what was capital and what was repair.
3. Agent and lawyer invoices for the sale.
4. Loan statements, rates notices and insurance invoices covering the period from the sale agreement to settlement.
5. If the property was rented, your rental schedules, so nothing is claimed twice.

Each taxable sale needs an IR833, the bright-line property sale information form, filed with your return. The form asks for these totals, so having them ready saves time with your accountant.

This is a guide, not tax advice. The line between an improvement and a repair, and how mixed use affects holding costs, can turn on the details, so check with your accountant for your situation.

Questions people ask

Can I deduct mortgage interest from a bright-line gain?

Only in limited cases. On a rental, interest is claimed against the rent each year instead. On a property earning no income, only interest from the sale agreement date to settlement counts. Interest while you lived there is private and never deductible.

Are real estate agent fees deductible?

Yes. Agent commission and lawyer's fees on the sale are selling costs, and an agent you paid to find the property counts as a purchase cost. Both come off the gain.

Is a renovation deductible from the gain?

A capital improvement, such as a new kitchen or deck, forms part of the cost and comes off the gain. A repair, such as fixing a fence, is a holding cost and follows the holding cost rules instead.

When are the costs deducted?

In the year the sale is taxed, which is usually the income year of settlement. Costs built up over the whole time you owned the property come off together.