Insights – FAQ’s – Do I pay tax when when I sell my home?
When clients sell their home we are often asked this question and like many other tax questions, the answer can be “it depends”.
Generally speaking, your home or main residence is free from Capital Gains Tax.
According to the Australian Taxation Office (ATO), a property is considered a main residence if;
- you and your family live there
- your personal belongings are there
- it is the address your mail is delivered to
- it is your address on the electoral roll
- services such as gas and electricity are connected.
It is important to note that you can only have one residence for tax exemption at any given time and if you use your property for income producing purposes at any time (for business or rental) than you may not get away completely tax free.
Where you change your home from one property to another or it is part income producing you may be entitled to a partial main residence exemption.
For example if you use 20% of your home to run your home based business – only 80% of your home will be exempt from tax when you sell it.
There a number of rules which we can use in these situations to help maximise the non taxable component- one of them being the Six year rule.
6- Year Rule
Usually, a property stops being your main residence when you stop living in it. However, for CGT purposes you can continue treating a property as your main residence for up to 6 years if it is used to produce income, such as receiving rent.
During the time that you treat the property as your main residence:
- it continues to be exempt from CGT to the same extent that it was exempt when you stopped living in it.
- you cannot treat any other property as your main residence (except for up to 6 months if you are moving to a new home).
Where a home has been your main residence and you move out but do not use for income producing purposes, you can elect for that home to continue to be your main residence for for an unlimited time period. This includes where it remains vacant or you use it as a holiday home.
To be eligible to use the 6 year rules the property must have
- Been your main residence first.
- Stopped being your main residence – ie you no longer live in it.
Where you move back into the property or stop renting the property – your 6 year can reset again ie the six year rule applies to each period of absence.
If you continue to rent your former home for more than 6 consecutive years – it will be subject to CGT for the time period after the six years are up.
You will need to work out your cost base – which will now be the market value of your home at the time when you first used it to produce income plus any allowable costs since then.
We recommend when you move out of your home and start renting for the first time that you obtain a valuation/ appraisal on the property.
When do I make the choice which property is my main residence?
When you have sold a property that was your main residence and you also have another property which is or has been your main residence, you need to decide which of your properties you are electing to have as your main residence for the CGT exemption for a particular time period.
You declare your choice by how you report the sale of that property in your tax return.
How Can Alto Help?
The Alto team can help you understand your eligibility to use the main residence and the six year rule and will help you to compile all relevant information to minimise your CGT liability.
Author: Evan Jones