Property is a popular investment option for many, however, there are multiple rules and exemptions relating to property which can impact the calculation of the capital gain when the property is sold. The below rules outline possible circumstances that could apply to you.
Whilst there is no separate tax rate or separate tax return for capital gains, any gain you make from selling an investment property is included on your income tax return based on the contract date of the property sale. This gain forms part of your taxable income and tax is paid at your marginal rate based on your taxable income.
Calculating capital gains
If the property has been available for rent for the entire ownership period, the capital gain/loss is calculated as the proceeds from the property sale less the cost of the property. Our rental property checklist includes details of payments which are included in the capital gain calculation (for example: legal fees for purchase and sale, transfer duty, commission paid to the agent).
Main Residence Exemption
You may be eligible for a complete exemption from paying capital gains tax on a property if you meet the following criteria:
- The property must have a dwelling (a structure used for living);
- The property was the main residence of the owner and their dependants (including a de-facto spouse) for the entire period of ownership;
- The owner must be an Australian Resident for tax purposes during the entire ownership period;
- The land surrounding the property must be less than two hectares; and
- The property must not have been used to earn assessable income (not a place of business, rented out, or “flipped”).
You are only allowed to apply the main residence exemption to one property at any time. However, if a new home is purchased before disposing of another, both residences can be treated as the main residence for a maximum period of six months. De-facto spouses also cannot have separate main residences (for example a home which was then rented when moving in with the spouse).
Even though the property is exempt from tax, you must complete disclosure items on your tax return to show the main residence exemption has been used during the financial year.
6-Year absence
A taxpayer may continue to be eligible for the main residence exemption after they move out of the property. The period which the property remains your main residence can be six years if it has been used to produce assessable income, or indefinitely if not used to earn assessable income. The 6-year period resets each time you live in the property. If you own multiple properties you may have the option of choosing which property is exempt from tax using the main residence exemption.
We frequently see this exemption used by those who work overseas and rent out their family home in Australia.
Partial Exemption
Where a property has been a main residence for only a portion of the taxpayers’ ownership, it may be eligible for a partial CGT exemption. The capital gain depends on the order you lived in and rented the property.
Live first then rent
In the case that the property was your main residence first and then rented out, the cost base of your property will be based on a market valuation at the time the property is first used to produce assessable income. The valuation can be completed by either your local real estate agency or a professional valuer.
Rent first then live
If your property was used as a rental property at the time you purchased it and then became your main residence, the capital gain or loss will be calculated based on the proportion of time the property was a main residence. The capital gain is calculated by dividing the days it was not a main residence over the total days of ownership.
Transferring a property
When gifting property to friends or family, a CGT event may still apply. If the property was your main residence, the main residence exemption continues to apply.
You will need to pay tax on the capital gain calculated on the sale of the property as if it was sold at market value (even if the property was transferred for $0). The market value can be obtained by a real estate agent or professional valuer, and is based on similar recently sold properties in the area.
If the transfer was due to a breakdown of your marriage, the rules above do not apply.
Deceased estates
A main residence inherited from an estate is exempt from tax if it is disposed of within 2 years of the date of death.
Rental properties inherited from deceased estates have different tax consequences depending on the date of death and when the asset was originally acquired.
The tax consequences of property inherited from deceased estates can be complicated as a multitude of scenarios can exist. Please contact your advisor for advice in this area.
Learn more
Should you have any questions regarding capital gains tax implications of a property sale, please contact Pilot Partners on info@pilotpartners.com.au or (07) 3023 1300.