Talking Cents

Small business accountants advise if your family home is tax free or not

With many tax loopholes constantly being closed by successive State and Federal Governments one of the last remaining tax free environments is the residential family home. Buying and selling the family home is a tax free transaction that genuinely avoids Income Tax, Capital Gains Tax and Goods and Services Tax in 99% of situations. For the overwhelming majority of individual taxpayers there will be little doubt that selling the family home is a private transaction that need not involve the taxman. However it's the 1% of exceptional circumstances that catch out the uneducated and uninformed taxpayers that as tax accountants in Sydney we hate to see. It will always pay to make preliminary enquiries of your trusted tax adviser/accountant to make sure you don't fall into the 1% category and risk the ire of the taxman. There are many, often complicated, scenarios that will drop you into the 1% category that are worth exploring in a little more detail.

The main residence exemption is what we all rely on to buy and sell our family homes tax free. The exemption can only apply to one primary residence, so if you do have more than one residential property in your name be sure to only nominate one as your primary residence. The other property will be considered an investment and subject to CGT upon sale. The only time that it is possible to have two residential properties that both qualify for the main residence exemption is when you are moving from one home to another. In such cases you can generally treat both homes as your main residence for a period of six months, provided neither property was used to generate rental income in the preceding twelve month period. 

Sadly, the breakdown of a marriage can often take a turn for the worse when it comes to dividing up the assets of the marriage, there are specific capital gains tax laws that deal with divorce settlements. Where one partner transfers a property or share of a property upon divorce this “disposal” is treated as being tax free. Capital gains tax is then pain in later years when the partner who owns the property post-divorce sells the property.

Another area of capital gains that can be difficult to manage is upon the death of a property owner. Where the property passes directly to the deceased’s beneficiary there is no capital gains tax for the estate of the deceased to be concerned with. For those who inherit the property there are two conditions for the property to remain capital gains tax free. Firstly, the property must be sold within two years of the persons death. If you choose to rent out the property during this two year period the exemption still applies. Second, if you do not dispose of the property within two years of the death of the property owner, your sale will still be capital gains tax free if you do not earn any assessable rental income from the property in that time. If you do earn rental income and sell the property outside the two year exemption window then capital gains tax will apply to you as the new property owner.

There is also a six year exemption whereby you can move out of your main residence, rent it out and generate a rental income for a period of up to six years after you cease living in it. So if you move out of your family home, buy elsewhere and continue to own and then rent out your old home you can do this for a period of up to six years and still be able to treat that property as your main residence and thereby sell the original property capital gains tax free. If you rent out this home for more than six years it can no longer be your primary residence and will be treated as being subject to capital gains tax upon sale. 

More and more people are setting up home based businesses in recent years. When your home is also your place of business you are entitled to legitimately claim yearly tax deductions for expenses related to the properties utilities, depreciation on any equipment of improvements to the home and the cost of ownership which can include mortgage interest, rates and home insurance. However, for those who choose to make such tax deductions it must be pointed out that your home is no longer just your primary residence and will be subject to capital gains tax for the period that the home was also used as a place of business. This can be quite a substantial amount of tax to pay, so caution must be exercised here in terms of deciding whether or not the yearly deductions will outweigh the potential capital gains tax issues should you decide to sell your family home/place of business. Note that those merely using their home as a “home office” for extra work away from your main place of work such capital gains issues do not apply.

As you can see there are many areas where capital gains tax can apply to private residential homes. In most of those scenarios a little forethought and careful planning will allow you to sell tax free but caution must always be exercised. Tax office data matching programs are becoming increasingly sophisticated and will catch out those who either flirt with danger and knowingly take risk or those who are careless and simply do not seek out the appropriate advice at the time of making the decision to sell a residential property. Either way, as far as the tax laws are concerned it’s a matter of seller beware.

For any questions on your property contact us your small business accountants in Surry Hills today.