With the spring rush property season already underway, one of the things that most home sellers overlook is their tax position.
According to Mark Chapman, H&R Block’s Director of Communications, selling your main house remains free of capital gains tax. However, many home sellers are putting that tax exemption in jeopardy when they use their home to produce income through renting out part or all of the property or running a business from home.
“If you tick one of those boxes, you may be forsaking part of your CGT exemption. This is because you cannot usually obtain the full main residence exemption if you used any part of your home to produce income during all or part of the period you owed it,” said Chapman.
Chapman gave several scenarios for the forfeiture of this tax exemption. For someone running a business from home, the seller needs to estimate the percentage of the floor area of the house that is being used for his home-based business, as well as the length of time that he is operating the business at home. The same goes for home owners renting out a room.
For someone renting out his whole house while temporarily working away from home, tax law allows him to use the six-year absence rule. This involves living away from home and earning income from renting it out for up to six years, as long as he does not require another main residence in the meantime.
Chapman advised sellers to consult an accountant to know exactly how much tax they need to pay.
“Either you or your accountant will need to do a tricky calculation to work out how much of the profit on disposal of your house is taxable,” he said.
“In most cases, this is the proportion of the floor area of the home that is set aside to produce income and the period the home was used to produce income.”
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