Thursday, 28 January 2016

CGT & Your Castle (Main Residence Exemption)

Every man’s (or woman’s) home is their castle and when it comes time to upgrade to one with a bigger pool room, you are going to want to make sure the tax man gets as little as possible.
You’re going to want to…

Capital Gains Tax
Capital Gains Tax (CGT) is the tax payable on the increase in value of a capital asset from when you bought it (cost base), compared to when you sell it (sales proceeds).
This gain will form part of your assessable income and will be taxed at your marginal tax rate subject to a few potential exemptions and discounts.

So what is classified as your castle (Main Residence)?
Generally, a property is considered your castle if you live in it i.e. it’s your home.
You can only have one main residence at a time.
Thankfully, the government has exempted from tax any capital gain arising on the sale of your main residence. IE if the property was your main residence for the entire time you owned it, any capital gain made on the sale will be fully exempt from CGT.

However, it’s not always clear when a property is your main residence, and often its use or purpose may change over the course of ownership. For example, what if you:
  • Rent the property out prior to moving in
  • Rent the property out after living in it for a while?
  • Buy another house to move in?
  • Go overseas or interstate for work and rent it out?

Short answer – IT DEPENDS! Whether or not you can still get a full exemption (or maybe just a partial exemption) will depend on your specific circumstances – TO BE SURE TALK TO US!


Six-month rule
Sometimes you find a new dream castle with a pool room SO GOOD you jump in and buy it before you sell your old one! The ATO understands that selling your old home takes time, so whilst they generally only allow one castle to be your main residence at a time, they give you six months from the date your new castle became your home to sell your old one, and still claim it as your main residence (subject to one or two provisos).
If you don’t sell your old home within 6 months, you will have to elect one property to be your main residence. The other property may only be eligible for a partial exemption.

Six-year rule
Generally speaking, when you decide to rent or move out of your home, it is no longer considered your main residence.  However, in some circumstances, you can choose to continue to treat your property as your main residence even after leaving.  But if this choice is made, then you’re NOT able to have another main residence in that period.
Examples of this include if you move out of your home, and decide to rent instead of buying a new property, or decide to leave our golden shores for work, or perhaps just for some serenity.

If you choose to rent out your castle, you will still be entitled to the full capital gains exemption if the property is sold within 6 years of you moving out, so long as you don’t establish another main residence.
Each time you move back in (for a minimum of three consecutive months), and then leave again, the six years will reset.
If you rent your castle out for over six years, the property will be eligible for a partial exemption from CGT.

Market Valuation
The ‘home first used to produce income’ rule impacts the cost base used to calculate capital gains.  Rather than using what you paid for the castle, the property is treated to have been acquired for market value at the time it was first used to produce income.

You really should make sure that you maximise the law that encourages investment in your castle.
With the increase in property values over the past few decades and the amount generally invested, making the most of the law can literally save you THOUSANDS OF DOLLARS.
If you would like more information about the Castle/Main Residence Exemption or CGT in general, or to find out which rules and exemptions apply to your situation, please contact us.
Oh and if you like this, please like our Facebook page for regular updates!