Tax Q&A: Renting out your permanent residence and CGTs

By Nila Sweeney | 11 Jun 2015
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Q: Could you tell me how long after you purchase a property must you live in it before you can nominate it as your principal place of residence if you want to turn it into a rental at a later date?

A: When a property is first acquired, it can be established either as a main residence or a rental investment.

Where the property is first established as a main residence, it will be exempt from CGT if sold at a profit at a later time. Where it is later rented out, the exemption can continue for another six years, but on the condition that no other property is nominated as the main residence.

The time when a property needs to be nominated either as a main residence or rental investment is at the time of sale, because that is when capital gains (if any) has to be calculated. Generally, the extension provided by the six-year rule is designed for situations where people move interstate or overseas for work, or their circumstances change in some way.

To determine whether a dwelling/property is established as a main residence (MR), the Australian Taxation Office (ATO) looks at the following factors, amongst others:
  • the length of time you live there – there is no minimum time a person has to live in a home before it is considered to be their main residence
  • whether your family lives there
  • whether you have moved your personal belongings into the home
  • the address to which your mail is delivered
  • your address on the electoral roll
  • the connection of services (for example, phone, gas or electricity)
  • your intention in occupying the dwelling

The longer a property is occupied with the above conditions, the more likely it is to be considered a MR.

On audit – usually carried out a long time after the transactions happen – intention is seen differently by the ATO, with the benefit of hindsight rather than the owner’s expectation.

For example, selling within a short time after renovation may imply an intention to re-sell at a profit. Being involved in the building/construction/development trades tends to alert the ATO that the intention was for profit making and not investment.

An example from my practice is a client who was on the Sunshine Coast, who purchased a distressed home at a bargain price. After occupying the property as the main residence for two years, the client moved to a new job in Sydney, where he bought a second property and occupied that as his main residence.

After another two years, he wanted to sell both properties and buy a more expensive one to live in. At this point, the question is which property should be nominated as the main residence?

On calculating an estimate, growth on the Sunshine Coast was much greater than growth on the Sydney property. So where the Sunshine Coast property is nominated as the main residence for the entire period – while occupied and then while rented – it would yield the lowest capital gain on selling both properties.

– Shukri Barbara

Q: My mother recently passed away and left two properties to be split between my sisters and me. The first property was my mother’s residence, although it was rented out for 12 months to assist with nursing home fees. The second property was purchased as an investment and was rented from 1969. My sister and I have decided to keep one (the residence), and sell the investment property. Does capital gains tax apply to one or the other, or both, or not at all?

A: In relation to the first property (which was your mother’s principal place of residence), an inheritance to you and your sister does not attract either capital gains tax or stamp duty on transfer.

Provided your mother didn’t elect or nominate any other property as her principal place of residence whilst the property was used for income-producing purposes for the 12 months that she was living in a nursing home, then there will be no capital gains tax paid by her estate either.

Also, there are exemptions with nursing homes that are available as well. Either way, your mother’s principal place of residence is tax-free when you and your sister inherit the property. Going forwards though, to preserve the capital gains tax-free status of this home, you would need to sell the property within two years from date of probate, otherwise there may be capital gains tax applicable. If this property is kept indefinitely (i.e. never sold) and used for income-producing purposes, then the net rental income will be assessable.

As the second property (an investment property from 1969) is a pre-20 September 1985 asset, there is no capital gains tax upon inheritance, and the cost base of the property is re-adjusted to the market value at the date of probate. For example, if your mother purchased the property for $10,000 in 1969, and the market value on probate is $500,000, the cost base and acquisition date are re-adjusted to current market values and dates.

Therefore, if you and your sister were to sell this property in the future, say for $600,000, the capital gain will be $100,000, and provided you are eligible for the CGT 50% discount (the property must be held for at least 12 months from inheritance and not owned by a company) then the taxable capital gain becomes $50,000 as you and your sister’s respective shares. Please note, that there is no two-year capital gains tax-free period for this investment property, as this only applies to inherited property that was used as your mother’s principal place of residence.

– Angelo Panagopoulos

The tax experts

Shukri Barbara is a CPA, CTA and principal advisor at Property Tax Specialists, with over 30 years’ experience in public practice, specialising in property tax, ownership structures, asset protection, (legally) minimising tax, and cash flow analysis

Angelo Panagopoulos is principal at Hamilton Reid Chartered Accountants, specialising in property and taxation, asset protection and ownership structures.

The views provided are of a general nature only and should be considered as general education. Readers should not act on the information above without obtaining professional advice relevant to their circumstances. The article is intended as information only.


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