The Australian Taxation Office (ATO) state that "the most common capital gains tax (CGT) event happens when you sell or give away a CGT asset such as real estate, including your family home, holiday home, investment property, hobby farm or vacant block of land". Nearly all investors are aware of CGT in relation to investment properties, but the situation is different in relation to other properties, especially family homes.
The unpleasant surprises
Imagine finding out months after selling your family home and buying a new one, that there is a need for complicated tax calculations followed by a big tax bill on the gain on the sale of the first family home.
Imagine buying a block of land to build your own home, but having to sell it and buying a different one while spending money on the change-over and house construction and months later finding out that there is a big tax bill on the gain on sale of the first block.
Imagine selling your investment property at a loss having to fix the property after a bad tenant whilst paying holdings costs (interest, rates, taxes etc.) and later realising that these costs cannot increase a capital loss and are essentially “ignored” for tax purposes.
Another painful example is when a holiday house, hobby farm or rental property was rented to family member at below market rate is sold but the records in relation to capital and holding costs are missing meaning the taxable gain can’t be reduced by costs actually incurred.
Issues to consider
Selling your family home, hopefully, should not attract CGT but it is not always the case which could be a big shock for many. The sale of your family home is still a CGT event for tax purposes and whilst an exemption is in place under subdivision 118-B of the ITAA 1997 (which has 40 sections), it is a complex area of taxation with its own quirks and peculiarities.
If a family home is sold, the tax return should reflect the fact that there was a CGT event, and the 118-B main residence exemption was claimed. Some people do not realise that such full exemption is limited to only one property held at a time on area up to two hectares. Furthermore, the following are some circumstances which may impact your claim to the main residence exemption:
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running a business from home
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letting part of the residence (e.g. to a friend or via Airbnb)
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being away from the main residence for a period of time and renting it during periods of absences
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having multiple properties and claiming part exemptions
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demolishing buildings before selling and selling it as vacant land
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building a principal residence on land held for a number of years prior to the commencement of construction
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an individual’s tax residency status may deny ability to use the main residence exemption. The 50% CGT discount may also be impacted due to a person’s tax residency status.
Whether it is in relation to your family home, holiday home or investment property, it is worth checking if there are any unintended CGT or even GST consequences before making any decisions. Unfortunately, some property owners find out about the tax issues at a later point - when it is usually too late to do anything about them. Sometimes the initial surprise is followed by “I thought or assumed something different” and “it is not fair” argument. In many cases, it is difficult not to agree about fairness aspect, but tax rules are based on legislation, ATO interpretations and court cases, and fairness ‘pub’ test usually does not help.
There are obviously many other tax issues in relation to properties and giving a tax advisor a quick call before deciding on a course of action, can make a big difference. Also, please remember to keep records in relation to costs and use of your properties, even family home in many cases.
Be sure to look out for our next installment of Property and Taxes: Inheritance Nuances!
More information
If you require any assistance in understanding property and capital gains tax, please contact your local Moore Australia advisor.
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