Many Australians scrimp and save for years to purchase, if not their dream home, at least a home where they can live comfortably for decades to come. But what happens when you want to sell your residential property? What are the tax implications – CGT, exemptions and the like? And what if you want to buy a new home but keep your previous property as an investment?
Here's our rundown on what to expect, and what your options might be, when selling your property.
What are the capital gains tax consequences when selling your main residence?
At some point in the future, you may choose to sell your main residence (the home where you live most of the time) and live somewhere else. If you sell your main residence at a capital gain (more than you paid for it), this gain may qualify for either a full or partial exemption from capital gains tax (CGT).
You will be able to obtain a full CGT main residence exemption so long as the following three conditions are met:
- You have used the dwelling as your home for the whole period you owned it;
- During this period, you never used the dwelling to produce assessable income (e.g. rented it out or used part of the dwelling as a home office); and
- The land on which the dwelling is situated is 2 hectares or less in size.
On the other hand, if you've used the residence to produce assessable income in the period you owned it (subject to specific absence rules discussed below), a partial CGT main residence exemption will apply. In this case, the CGT will be apportioned to only include those periods where the residence was not used to produce assessable income. This is demonstrated in the example below.
Example of a partial CGT main residence exemption
Sally buys her home on 15 June 2008 for $800,000, and lives there until 14 June 2011. From this date, Sally decides to rent the property out to tenants. Two years later on 15 June 2013, Sally sells the house for $1.2 million.
The capital gain on the sale is $400,000. However, Sally is only entitled to a partial CGT main residence exemption because she derived income from the property for some of the time she owned it (the rent from her tenants). The amount of capital gain that will be exempt is the proportion of the time the house was used as a main residence (ie. 3 of the 5 years that Sally owned the house).
Therefore, Sally's exempt capital gain will equal 3/5 x $400,000 = $240,000. This means Sally's taxable capital gain will be $160,000 (i.e. $400,000-$240,000).
Since Sally owned the property for more than 12 months, she will also be eligible for the CGT discount. This means that she will only be subject to $80,000 CGT on the sale of the property.
How is this affected by the 6 year absence rule?
It will normally only be possible for a property to qualify as your main residence if you live in the property and treat it as your main residence. However, in some circumstances, it's still possible to treat the property as your main residence even if you were absent from the property for up to 6 years.
This concession can be very beneficial, especially if you're considering moving out of your home to live somewhere else. It's important that a move such as this is for a valid reason (eg. because you're going overseas for your work) or the 6 year absence rule may not apply.
The 6 year period is reset each time an owner starts using the house as a main residence again (so you can have multiple six-year itches). Generally, it isn't possible to claim the main residence exemption on another property at the same time.
Example of the 6 year absence rule
William buys a house in 2005, and occupies it as his main residence. In August 2008, William moves overseas for work and rents out the house during his time away. In 2009, William returns to Australia and moves back into his house. However, in 2010, William goes overseas again to work for a period of 24 months. In 2012 William returns to Australia, and wants to sell the house.
The full CGT main residence exemption will apply, so that no CGT will be payable on sale of the property. This is because William was never away from his property for more than 6 years at a time, and had a good reason to move away. What makes this scenario different from Sally's is that William did not treat any other property as his main residence during his period of absence.
Turning your main residence into an investment property
Another possibility that may arise in the future is where you want to move out of your main residence and live somewhere else, while keeping the original property as an investment. For example, you may have been relocated for work, or you may want to downsize where you live (eg. the so-called empty nesters whose children have left home).
In these kinds of circumstances, it may be possible for your main residence to become an investment property. It's important to understand that converting your main residence in this way may have important tax consequences.
Tax deductions in relation to rental expenses
Generally, it's only possible to deduct rental expenses that were incurred to derive income from an investment property (so long as these expenses were not of a private or capital nature). Depending of what kind of rental expenses are involved, these expenses can either be deducted immediately or over time.
Some of the expenses that may be immediately deductible include:
- interest paid as part of the loan repayment
- the cost of advertising for tenants
- lease document expenses and legal expenses
- repairs and maintenance to the property
- body corporate fees and charges related to administration
- council rates and insurance
Some of the expenses that may only be claimed over time include:
- borrowing expenses of more than $100 if spread over the lesser of 5 years or the term of the loan
- amounts for the decline in the value of depreciating assets over their effective life (if more than $300)
There are some expenses you can't claim as a tax deduction. These include acquisition and disposal costs of the property (these are capital in nature), expenses incurred by someone else (e.g. electricity charges the tenants have paid), and expenses unrelated to the rental of a property.
Considerations for the future
If you're thinking about changing homes, or moving overseas, it's important to understand the tax consequences of such a decision. For example, as outlined above, there may be capital gain implications involved when selling your main residence or various tax benefits available should you choose to turn your main residence into an investment property.
It's important to note the advice set out here is of a general nature. As such, the tax consequences may differ depending on your individual circumstances, and so you should always seek further advice.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.