Thinking of renting out your family home and concerned about a looming Capital Gains Tax bill – let us dispel the myths for you!
Capital Gains Tax refer to the gains you make when you dispose of your property and how this is treated by the ATO. These gains are included on your tax return and the tax is calculated based on your individual tax rate. When it comes to real property, these gains could be massive, resulting in a hefty tax bill.
The ATO, however, places an exemption on your main residence. That is, they consider the house where you primarily live as not an investment and therefore exempt from capital gains tax when you ultimately sell it.
The 6-year rule
But what if you don’t live in your primary residence and choose to rent the place out while you’re away? Are you now caught up in paying tax? The answer is no in some circumstances. The ATO allows you to still treat the property as your main residence for up to six years. This means you can earn money from your main residence for up to six years and still be CGT-free when you sell within that timeframe. It is worthy to note that the rule resets each time you move back into the home for the period, provided each time off is less than six years.
Of course, there are limitations. First, you cannot elect another property as your main residence. A person can only have one main residence at a time. You must also ensure that the property was first bought and became your main residence (i.e., it can’t have been an investment property to start with). Lastly, only homes used to produce income after 1996 are covered by this rule.
You can still be taxed on your main residence
It goes without saying that exceeding the 6-year limit will make you liable to pay tax on the profits when you sell your main residence. Anything earned beyond the six years will be apportioned based and partly taxable. If you are thinking of renting out your main residence, it will be practical to speak to your accountant to consider the tax implications before making significant decisions. You may call us at (07) 5451 1118 for any questions relating to the above and any of your other tax concerns.