Chan & Naylor’s Managing Partner of Property & Business Tax Accountants in Perth, Lilian Fisher, discusses capital gains tax in the August 2018 issue of Your Investment Property magazine.
The popular investment magazine has a Tax Q & A section where readers get their tax questions answered by experts like Lilian.
Capital gains tax question
One reader asked Lilian about any capital gains tax implications that he may have if he sold his property. His situation was about a unit that he had purchased and lived in from 2008 to 2016. He then purchased another home but kept his unit to rent it out. He now also plans to rent out his current home for the next five years as he plans to live interstate. The reader is now contemplating on selling his first unit after renting it out for two years and wants to know the capital gains tax implications if any.
Mrs Fisher answers this question by first discussing the maximum period a home can be treated as a main residence if you plan to place it for rent. She says the maximum period is six years from first renting it out. However, a homeowner can only have one main residence at any given time.
“Should you elect to nominate your unit as your main residence until you sell it, then no CGT will apply on the sale as you will be able to claim main residence exemption on that property.” She adds, “However, that will mean your current home will be subject to pro-rata CGT when you sell.”
Here is a formula to use to calculate the future capital gain on a home.
Taxable capital gain = Total capital gain x Days property was main residence for tax purposes / Total ownership period
If you choose to nominate your current home as your main residence, then your current home will be subject to capital gain.
Get the reset cost base for CGT
To determine the reset cost base of a home for capital gains tax purposes, one should acquire a valuation of the home at the date it first earned rental income. The capital gain for tax purposes would then be calculated based on the reset cost base.
According to Mrs Fisher, any costs that you have before that first rental date are excluded. In addition, once the home is rented out, any capital improvements can be added to the cost base for CGT purposes. Furthermore, any costs you incurred and were not able to claim as tax deductions against your rental income can also be added for CGT purposes.
However, Lilian adds, “The reset cost base will be reduced by the depreciation claimed in relation to the property. As you have rented it out for more than 12 months, the capital gain will be discounted by 50% for tax purposes.”
In the reader’s case, she advises him to keep his current home as his main residence from when he purchased it in 2016 until now. If he does decide to live interstate, he can still elect to have his current home as his main residence for up to six years. This, however, will only apply if he continues to live in Australia.
As of 9 May 2017, those who live outside the country cannot claim the temporary absence rule of up to six years. The only exception to this rule is if one purchased a property before 9 May 2017 and then will sell it prior to 30 June 2019, in which case, the main residence exemption could still be granted.
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If you need more assistance with capital gains tax, contact a Chan & Naylor accountant near you, and we’ll be more than happy to help.
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Source: Your Investment Property