Q&A: Capital Gains and Your Property
No one likes to 'donate' to Government coffers unnecessarily, so if you're a property owner or investor, we answer three of the most common questions about capital gains tax.
Australians have had a deep love affair with property over recent years, however if the thought of the ATO sharing up to 50% of the gains you make on an investment decision gives you the shivers, read on.
In general, CGT applies to any change of ownership of a CGT asset, unless the asset was acquired before 20 September 1985 when the CGT rules first came into effect.
We are frequently asked about how to manage capital gains on property, and most questions related to the main residence exemption that means it is not exposed to capital gains tax when you sell the property. However, the onus is on you, the property owner, to demonstrate your property should be exempt from CGT.
Here are the top 3 questions we get asked relating to property.
I jointly own an investment property with my elderly mother and neither of us has ever lived in the property. We have recently updated our will and the lawyer says that if my mother's will gifts her share to me, then the 'gift' will not attract capital gains. Is this correct?
The answer to this question is: kind of. Generally speaking the ATO looks at property like this: if it looks like a duck, walks like a duck and quacks like a duck, then it's a duck. Your legal document can't say it's a goose to alter its exposure to capital gains, which is a matter of fact and substance.
There are some things that influence how you are taxed. Firstly if you jointly owned the property, then your individual exposure will depend on how the property is owned. If the property is held as tenants in common, then any CGT exposure is in line with your ownership interest. In this case you own 50% but the percentage can vary in other cases.
If the property is owned as joint tenants, then any CGT exposure is equally shared by the owners.
Generally, there would not be any tax liability until you sell the property, should you inherit your mother's share. What is important though, is how the CGT is calculated when you sell.
When the rental property transfers to you from your mother's estate, the tax rules determine how CGT is calculated when you sell it. If the property was bought on or after 20 September 1985, then CGT will be based on the original purchase price. You are taxed on the increase in value since it was acquired, including the portion that accrued while your mother was still alive.
I bought a house in 2000 and lived in it until 2003 when I was posted overseas. I was away from 2003 till 2011, during which time my brother lived in the house rent-free and paid for utilities. From 2011-2012, I rented the house out to tenants and then moved back into the property in 2012. I've just sold the house – do I have to pay capital gains on the property?
Capital Gains Tax rules are somewhat flexible to how people live their lives than other tax laws and in some circumstances allow you to continue to continue to treat your home as your main residence even if you're not actually living in it.
For example, if you are away overseas and leave the property vacant or let a friend or relative live in the property rent-free, assuming you don not claim any other property as your main residence, then you can continue to treat the property as your main residence for CGT purposes indefinitely.
If you rent your property whilst you're overseas, then you can still claim the property as your main residence, provided it is not for more than a total of six years. This six-year period can be reset by moving back into the property again.
Effectively what this means that you can:
- Move in and out as often as you like and still claim the property as your main residence as long as it is your only main residence during that time
- Rent it for no longer than a total of 6 years across the period you are claiming the property as your main residence.
During the rental period you can also claim deductions against the rent, even though the property might still be exempt from CGT during this period.
I bought my property in 2008 while it was still tenanted with 8 months to go. I had expected to be able to move in straight away but had to wait until the lease expired, however once it had I moved in and have lived there ever since. I want to sell the property later this year – can you confirm if I still qualify for the full CGT exemption on the sale as the property has significantly increased in value?
This is a very common situation for property owners and overlooked a lot of the time, however unfortunately in this case, you would not qualify for a full exemption.
The main residence rules allow you to treat the property as your main residence provided you move into the property as soon as practicable after settlement. This is intended to cover unexpected delays such as illness or a 'reasonable' cause that prevent new owners from moving in. The ATO is clear, however, that this rule does not apply if you're waiting for existing tenants to vacate the property.
You will only qualify for a partial exemption under the main residence rules, which is calculated by looking at your gross capital gain and then apportioning it to reflect the period of time when it was actually your main residence – i.g from the date you moved in. Provide you are n Australian resident and have owned the property for more than 12 months, the 50% discount can be applied to reduce the leftover capital gain.
It will be important in this case to gather as much evidence as possible of non-deductible costs that you have paid in relation to the property such as stamp duty, legal fees, commission paid to real estate agents, interest, rates, insurance, etc. This will help to reduce the gross capital gain that is subject to tax.
Property is an area that can be complicated for tax payers. For more information about capital gains tax and how affects the sale of your property, please contact us on 02 9957 4033.
This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.