Tax on the Family Home
By Ken Raiss
Tax relief on the family home is generated under the Main Residence Exemption (MRE) but certain conditions must be met before the full benefits can be gained.
In summary to gain the full benefit of the tax relief you must have moved in as soon as practicable and occupied the premises as your main residence. This will not be the case for many people and so it is important to understand the various scenarios when dealing with the family home. Remember land tax exemptions only apply if the property is used as your main residence.
1. Move out of the Home
If you move out and identify a new property as your main residence then any growth on the first property from the date of moving out will be taxed at normal rates subject to the 50% CGT discount rules. You can choose which property to apply the MRE when you complete your tax return for the year where you sold.
If you move out of the first home and do not identify another property as your main residence the property will still be eligible for the full exemption for up to six years after moving out.
If the property is not used as an investment property after moving out e.g not rented out, it can be treated as your Main Residence indefinitely. Note that, for this rule to apply, the dwelling must have already been your Main Residence and you do not identify another property as your Main Residence.
2. Property Used Initially as an Investment Property
If the property is initially used as an investment property and then you move in making it your main residence the tax consequences on any subsequent sale are calculated by taking the whole capital gain and, proportionally allocating that gain (based on days) to when the property was your main residence. This portion will be tax exempt with the proportion allocated to when it was an investment, taxed at normal rates subject to the 50% CGT discount rules.
What is critical in this scenario is the use of the correct cost base to calculate the capital gain. Normally the cost base would be the original purchase price plus any subsequent capital works. In this scenario the tax payer is entitled to allocate expenses which were not tax deductible while living in the property as the main residence. These expenses include interest, repairs, council rates etc. These will increase the cost base thereby reducing the capital gain to which the proportional calculation is applied.
3. Property Never Used as an Investment or Family Home
If a property is never used as either an investment or family home but say, a holiday home, the tax consequences on a sale are calculated but , all expenses such as interest, repairs, council rates etc are added to the purchase price. These will increase the costs base thereby reducing the capital gain to which the normal capital gains rules apply.
4. What Happens on Death
The home you were living in as your family home at the date of death is the property that will be treated as your main residence.
Ken Raiss, Director of Chan & Naylor Platinum
For more information call 1300 250 122 or email firstname.lastname@example.org
See Ken Raiss presenting at the National Property & Economic Market Update 2012
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If you intend to rely on any of the information in this document to satisfy liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law, you should request advice from a registered tax agent. This information does not take into account your individual objectives, financial situation and needs. You should assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision. The information contained in this document is given in good faith and is believed to be correct at the time of publication, but no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors or omissions (including responsibility to any person by reason of negligence) is accepted by Chan & Naylor, its officers, employees, directors or agents.