Is your home exempt from CGT?

Expert Advice with Ken Raiss.

Trying to get your head around Capital Gains Tax (CGT) can sometimes be like attempting to learn a new language.

You think you’re doing alright with it and then someone from that country starts talking to you thinking you’re a local and you end up quite confused and no doubt a little embarrassed.

Of course, it doesn’t have to be that way, because there are experts out there who can assist you.

Just think of them like your very own tax interpreter!

In the meantime, though, and keeping to the foreign language theme, here are some of the basics of CGT language for homeowners to understand.

1.    You don’t pay CGT on your main residence 

Your main residence (or your home) is generally exempt from CGT, however you must move in immediately on settlement and live in it as such.

If your new home is being constructed on a vacant lot, you can treat land as your main residence for up to four years before the dwelling is finished.

You must still move into the property as soon as possible after it is completed and use it as your main residence for at least three months.

Generally, a dwelling is considered to be your main residence if:

•    You and your family live in it.

•    Your personal belongings are in it.

•    It is the address your mail is delivered to.

•    It is your address on the electoral roll, and

•    Services such as phone, gas and power are connected.

2.    When a home becomes an investment property

Generally, a dwelling is no longer your main residence once you stop living in it, which impacts more people these days as they upgrade to a new home without selling their previous one.

In this scenario, their new home would be classed as their main residence and would therefore be exempt from CGT.

However, because the other property had originally been their home, too, they can treat it as their main residence for up to six years if it produces income, or indefinitely if it doesn’t, if they sell it.

The caveat is that you generally cannot treat any other dwelling as your main residence for tax purposes for the same financial year period.

Of course, this only has relevance if you sold your former property while you are still living in your current home.

With multiple investment properties, for example, what this means if that you can choose which one will be classified as your main residence when you prepare your tax return for the year in which one of them was sold – but only if you lived in that property within the previous six years, for example.

These days, more people are also choosing to rent out their home and lease a property somewhere else, that is, they are opting to become rentvesters for a time, which is another piece of tax language that it’s best to get expert advice about.

3.    You run your business from home

One of the biggest changes to society over recent years has been the drastic increase in the number of people not only working from home but running a business from there, too.

However, this can unfortunately impact your CGT exemption.

Again, if this is your situation, it’s vital you work with your “tax interpreter” before lodging your first tax return from your home business.

That’s because tax issues can arise when you are generating business income from home as opposed to the more benign action of coming home from a workplace and doing some additional work from home.

It’s important to understand that if your employer has an office in the city or town where you live, your home office will not be a place of business, even if your work requires you to work outside normal business hours.

Also, if your income includes personal services income, you may not be able to claim a deduction for occupancy expenses.

So, that’s why it’s so important to consider any CGT impacts of claiming your home as a business premises, such as:

•    Proportion of the floor area of your home that is set aside to produce income.

•    Period you use it for this purpose.

•    Whether you are eligible for the “absence” or six-year rule.

•    Whether it was first used to produce income after 20 August 1996.

As you can see, there are many variables to consider when it comes to CGT and your home.

However, rather than trying to get your head around concepts that are probably quite foreign to you, it makes more sense to sit down with experts who not only understand the language of property tax, they like to talk about it all day long.  

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Ken Raiss is director of Metropole Wealth Advisory and gives independent expert advice for property investors, professionals and business owners. He is passionate about real estate investing and small business and is a regular commentator for Michael Yardney's Property Update.

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Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.