Your guide to capital gains tax when selling property
With property values experiencing significant growth post pandemic, some owners are looking to cash in while the market is in the seller’s favour. One key component that catches some sellers out is whether the sale will attract Capital Gains Tax (CGT).
Let’s start with, what is CGT, according to the ATO, “If you sell a capital asset, such as real estate or shares, you usually make a capital gain or a capital loss. This is the difference between what it cost you to acquire the asset and what you receive when you dispose of it.
You need to report capital gains and losses in your income tax return and pay tax on your capital gains”.
Of course, there are experts out there who can assist you figure out what if any CGT is payable on the sale of your asset. If you are uncertain if CGT applies in your personal case, I suggest you contact your trusted tax advisor and get their input.
In the meantime, here’s a basics guide to CGT for homeowners to get their head around this important tax event.
1. Paying CGT on your main residence
Referring back to the ATO, which states, “Your main residence (your home) is generally exempt from CGT unless you've used it to earn rent or run a business, or it's on more than two hectares of land”.
In the event you are building a brand-new home, you can treat land as your main residence for up to four years before the dwelling is finished. You must however 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.
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2. Converting your home into 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.
3. Impact of home-based business on CGT
One of the biggest changes to society over last 12 months 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 trusted tax advisor 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 impact of CGT on your property and unless you’re a tax expert, engage one to discuss your personal scenario to avoid being penalised by the ATO.
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This article via Yip does not constitute advice; readers should seek independent and personalised counsel from a trusted adviser that specialises in property, a tax accountant and property design specialist.