Hi, wondering if anybody out there has had much experience dealing with CGT. We sold our family home last financial year, after having it on the market for over 12 months (and rented for approx 9 months since we couldn't sell it) while we moved into our new home that we had finished building. I'm a little confused now because I am not sure if we qualify for the main residence exemption since it was rented for that short period. Even though we received rental income this was calculated as a loss on our last tax return once all the expenses were added up! Before renting out it was valued at $5000 less than what we received for the sale, but we gained $70000 technically from the original purchase price 8 years ago. We lived in the property the whole time since purchase and until we moved into our new house. I have in precious years always done my own tax however now I may have to see a tax agent although I would like to be able to do it myself preferably! Any clever people out there with any experience would be very interested to hear from! Thanks
Capital Gains Tax (Family Home Rented out)
Comments
Correct me if I am wrong but I believe you are only almost correct, or at least not giving all of the necessary advice re the 6 year absence exemption. Not having a go mskeggs, as you seem to be very knowledgeable re tax from other posts I've seen in the past.
You can generally only claim one residence as your main residence which means it is then exempt from CGT, apart from sparkles' 6 month transition exemption example below. If you claim the 6 year absence exemption for the previous main residence after moving out, the newly built residence will not be eligible for the main residence exemption during that same period as you have exceeded the 6 month term and used it to earn income.
https://www.ato.gov.au/General/Capital-gains-tax/In-detail/R…
"If it takes longer than six months to dispose of your old home, you may get an exemption for the old home for the period in excess of the six months by choosing to treat it as your main residence for that period under the ‘continuing main residence status after dwelling ceases to be your main residence’ rule. If you do this, you get only a partial exemption when you dispose of your new home."If the new property does not become and is not your nominated main residence immediately from the time you (can practically) move in after its acquisition, it is subject to CGT regardless of how long you live there, but it is a proportionate calculation (time not nominated main residence / total time owned), so the longer you live there, the smaller the % of any capital gain that will be taxable.
You'd have to confirm if you could accrue improvements and holding costs (loan interest, insurance etc) as part of the cost base, assuming you bother to declare any eventual gains on the new property.
Assuming you don't claim the 6 year absence exemption for the former house, when it ceases to be the nominated main residence (if after 20 August 1996), the cost base of the property is the market value and the time it first earned income.
https://www.ato.gov.au/General/Capital-gains-tax/In-detail/R…Quoting OP "Before renting out it was valued at $5000 less than what we received for the sale" so they made a $5000 gain, not a loss if I'm reading that correctly? So there is a capital gains event to consider. Incidentally, if there was a capital loss, you could offset it against other capital losses in the same year or carry it forward until it can be used. Did you make any (non-repair) improvements to the house during this time or incur advertising costs for its sale? Do you have any other carried forward capital losses to offset this gain?
In calculating the $5000 capital gain, have you taken into account selling costs such as legals, commission etc?
If the former house hasn't been your nominated main residence for more than 12 months, you should be eligible for the 50% general discount meaning you only have to pay CGT on 1/2 of the gains (at your marginal tax rate). If it was in joint names, the gain would also be split according to title ownership %'s.
In the end, think about paying to get some advice from someone who has to back up their advice financially, not on a public forum unless you're willing to 'risk it'. Apologies if I have any of this wrong.
Thanks for the input guys - and yes you are probably right, I may just have to seek assistance this year.
The $5000 gain has not taken into account the/ selling and legal fees to dispose of the property which was $11000, so this would actually be a loss.
Sorry, camjl is correct. I read that as sale price was $5000 less that the valuation, not more.
As camjl says, you can attribute sales costs and have the 50% discount for holding it > 12 months.I think it would be worth investigating whether you qualify for the 6 month exemption, and if that means you would only be liable for the gains in the remaining 3 months of the 9 month tenancy. And the gain in 3 months was only $1250. Less half for the 50% discount, less any expenses.
Found this on the ATO site:
Moving from one main residence to another
If you acquire a new home before you dispose of your old one, both dwellings are treated as your main residence for an overlap period of up to six months if:
you lived in your old home and it was your main residence for a continuous period of at least three months in the 12 months before you disposed of it
you didn't use it to produce assessable income (such as rent) in any part of that last 12 months when it was not your new main residence, and the new dwelling becomes your main residence.Seems renting it out has really put a spanner in the works and may prove very costly? The info is conflicting almost.
No. The worst outcome is liability for the capital growth attributed in the short time after you chose to make it not your primary residence. And since you have a valuation indicating it lost value in that time you will have no CGT obligation.
If the property has gone down in value from the time you rented it out and it was sold, you will need to declare a capital loss (which can offset future gains). You will still need to put something in the tax return to show you have address the matter and not just ignored it. Having a valuation on the property when it becomes a rental is important.
You gained $70000 "technically" and you want some cheap advice here which could if wrong cost you a stack of that "technical" profit.
We are not talking about the usual save a few bucks that this site can help you with.
Take the advice here, but be wise and VERIFY that with a qualified accountant or financial adviser. Its a small price to pay to get it right.
They will look at all the aspects rather than the well meaning people here who may not have all the facts at hand
Otherwise your bargain advice will not be a bargain
I think this comment is overstating the risk.
The only CGT liability is for the period when the property was not the principle place of residence. Clairegr got a valuation limiting that to, at most, $5k.
CGT is applied at your marginal rate, and has a 50% discount if the asset has been held for more than 12 months. So the maximum exposure is whatever Clairegr's tax bracket is on the discounted amount. Even if they pay 48% tax, the most the tax bill could be is $600.
I think it would be very surprising if there weren't expenses claimable to off-set that. Note also, as an income producing asset at the time of sale, all the sale expenses are deductions (are they classed as capital or operational expenses? My instinct would be to claim them against income, but a case could be made they are capital).I find it worth paying an accountant to do my taxes, but even so, we occasionally tease out complex issues like the one here to get a good outcome. In Clairegr's case, where they routinely do their own tax, kicking it around on the internet is worth doing, even if they end up paying a couple of hundred dollars to get somebody else to do their returns.
Fair enough, you seem to know all about CGT and your advice seems well considered.
However given the amount of money involved, I wouldn't take the risk that someone I have never met on the internet understands my complete situation.
This is no reflection on you or your well meaning advice.
For me I would use this to question my financial adviser if they gave different advice.
For me I would use this to question my financial adviser if they gave different advice.
Good middle ground.
You have 6 years after you move out before CGT applies:
https://www.ato.gov.au/General/Capital-gains-tax/In-detail/R…
Since you are doing your own tax, you need to declare rental income (attributed amongst the owners). You can also claim deductions for any costs associated with the property during the rental period, including the interest on the mortgage.
If you did any recent renovations you might consider whether claiming depreciation is worth it. I was very surprised at the amount a quantity surveyor estimated for an house that had renovations several years ago.