Most people assume that your home is exempt from capital gains tax (CGT) and as a general rule, if you own your home and you live in it, you are exempt. But did you know that there are situations where you can rent your home out and not be subject to capital gains tax? Sounds like a good deal? Well let’s delve into some CGT detail.
First things first, what are the conditions under which your main residence will be exempt from CGT? There are several factors which suggest that your home is your main residence. These include:
- You and your family live in it (ok, I think that one’s obvious)!
- Your mail is delivered there.
- It’s your address on the electoral roll.
- Services such as gas and electricity are connected.
There is no guidance as to how long you must live there in order for it to be your main residence, but you must actually have moved in and be able to prove that you reside there.
Once you establish that you are living in the dwelling, the entire property will be exempt from CGT providing:
- It was your home for the entire period you owned it.
- Has not been used to produced assessable income (either by renting or running a business).
- Is on land of two hectares or less.
If you build a new home, special rules apply. Generally you will be ok if you hold the land for less than four years before building and moving in; move in is as soon as practicable after it’s finished, and continue to live in it for three months.
Even more rules apply to situations where you renovate prior to moving in or where you acquire a new home before disposing of your old one. It is still possible to obtain a full exemption providing you meet certain criteria. If this situation applies, it is best to talk to an accountant before making decisions as the outcome will depend on your individual circumstances.
If you have earned income from the dwelling, there is still scope for a full exemption under certain circumstances.
As a general rule, once you move out of the dwelling, it is no longer your main residence. However, you can choose to continue treating it as your main residence in the following circumstances:
- For up to six years if you are using it to produce income (the “6 year rule”).
- Indefinitely if it is not used to produce income.
The important things to remember when applying this exemption:
- You must not have another dwelling that you are treating as your main residence.
- You must have first moved in and lived in the dwelling.
- The dwelling must have stopped being your home (that is, you are no longer living in the property, your personal belongings are not kept there, your mail isn’t being delivered there etc).
If you are renting the property out, the income earned must be declared in your tax return. You can offset all expenses incurred against the income (eg interest charges on the mortgage, rates, agent fees, repairs etc). If you make a loss (that is, it is negatively geared), you can offset the loss against other income. Once you rent the property out for 1 day more than 6 years, you cease to be able to claim a full exemption. However a partial exemption will still be available.
A partial exemption is available where a dwelling has been used for both earning income and as your main residence. For example, you initially purchased a property, rented it out for a period and then lived in it. In these circumstances, you will be able to claim an exemption for the period you were living in the dwelling but will have to pay CGT on the period for which it was rented.
The availability of a partial exemption will depend on individual circumstances; and are complicated, so if you think it might apply to you, the best thing to do is to talk to an expert. If you would like some help working out whether you have a CGT problem, you can easily book online here for a FREE 30 minute initial consultation.