Question: I have a query about whether capital gains tax is payable in my situation.
My mother-in-law has, up until 2017, lived in a home that she bought in 1967. The property is not lived in now, but if she decides to rent it out, I have two questions:
- If the property starts to earn rent, would CGT be payable if and when she comes to sell the property, even though it was purchased before 1985?
- Does she have to move back to live in the property within six years of first renting it out, to avoid paying CGT if she later sells?
She is living in aged-care accommodation at present. There are no fixed contracts as it is just on a monthly basis – she can leave at any time.
Answer: Most pensioners keep their family home when becoming residents of an aged-care facility.
"The reason for this is the concessional treatment of the former principal place of residence for Centrelink and aged-care purposes, as this would normally provide for a higher Centrelink benefit and lower aged-care fees."
Capital gains tax typically applies to properties that are not considered one’s main residence. If the property was regarded as a main residence, it is exempt indefinitely from the tax.
If the property is used to generate income via rental, there is a rule whereby you can continue to consider a property to be your main residence even if it has been rented out, unless you have named a different property as your main residence in the interim.
However, capital gains tax was only implemented on 20 September 1985. Thus, only assets gained on or after this date would fall under this ruling, and assets obtained prior to this are automatically exempt, with the exception of pre-capital gains tax shares held in private companies or pre-capital gains tax interests in private trusts.
Your mother-in-law’s property was purchased in 1967 and thus acquired before 20 September 1985 (this is called a ‘pre-capital gains tax asset’). It will therefore be exempt from any capital gains tax when she sells the property. As a result, the six-year rule requiring you to move back into the property within six years after renting it out in order to be exempt from capital gains tax does not apply in her case.
Rules around the main residence capital gain tax exemption represent an opportunity, especially around estate planning and the best ways to maximise the tax benefi ts. By this I mean you may want to consider the implications of renting the property out.
From an estate planning perspective, the property remains capital gains tax free if it is sold within two years of a deceased owner’s death. However, if the property market conditions are weak, you may not want to sell within two years. In any case, the property is still exempt from capital gains tax if sold after two years, provided the property was not used to produce income (rented out).
As you can see, the rules regarding capital gains tax exemption in this situation are very complicated and require a holistic approach that takes into consideration not only capital gains tax but also estate planning issues. Seeking professional tax advice is encouraged.
Need to know
- A property purchased before 20 September 1985 is a pre-capital gains tax asset.
- Pre-CGT properties are automatically exempt from CGT.
- The property remains CGT-free if sold within two years of a deceased owner’s death.
Peter Ristevski is director of
Chan & Naylor South West Sydney
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