21/01/2011
Question: My husband and I have owned an investment property for about 10 years now. We lived in it for five years and rented it out for three years. My husband has lived in it for the past two years. Do we have to pay capital gains tax if we sell it now? What can we claim as tax deductions? Thanks, Martha.
Answer: From your question I am assuming you did not have any other properties which you may have wanted to nominate as your main residence. You are allowed to move out of your main residence for up to six years without it impacting on the main residence tax benefit, as long as you do not nominate another property as your main residence.
As your husband moved back in after two years then the property can be sold without a CGT liability. (You advise that your husband moved back in but do not indicate your movements. This could affect the answer, depending on the circumstances.)
While the property was being rented all costs such as interest on borrowings, repairs etc are deductible and the rental income is assessable. The net – if positive – is then taxed half each at your individual marginal tax rates. If negative, you can each reduce your income and therefore your tax, again at your marginal tax rate on half the loss each.
If you had not moved back within six years or had another nominated property as your main residence, then the capital gain between the purchase cost and the market value at the time you moved out would be free of CGT. Any amount of gain above the market value from the time you moved out and the date sold would be taxable.
As you owned the property over 12 months this gain since you moved out would be reduced by 50%. Both you and your husband would pay tax on this reduced amount at your individual marginal tax rate.
Ken Raiss from Chan & Naylor
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Chan & Naylor is an accountancy firm that specialises in the areas of asset protection, wealth creation through property investing, estate planning and tax planning. The company ranks in BRW’s top 100 accountancy firms in Australia. For more information, phone (02) 9391 5400 or visit www.chan-naylor.com.au. The advice contained in this report is general in nature and its preparation has not taken any individual circumstances, objectives or financial needs into account. Readers are advised to seek appropriate advice from licensed professionals before embarking on any investments.
