By Andrew Hayes, Director, Westlawn Business Services
Let’s say you’ve been living in your only home for many years but now you want to move to a smaller place. You’ve built up quite a bit of equity and you’re likely to receive a large profit when you sell. Will you have to pay capital gains tax (CGT) on the money?
Generally speaking, you won’t need to pay CGT when selling your home because it likely falls under the “main residence exemption” to capital gains tax. Specifically, you may not be liable for any CGT when selling your home if:
The home is strictly residential and not used to produce income
The place has been your home for the entire period of ownership
Your property satisfies certain conditions related to things such as size.
If you satisfy some but not all of these conditions, you may be liable for some CGT, but perhaps not the full amount that would normally be payable.
There are many situations where tricky capital gains tax questions can arise relating to the sale of a home. For example, suppose you’re in the process of moving from one home to another and there is a period of time during which you own two homes at the same time. How do the rules then apply when you sell your first home? Your Westlawn Business Services Accountant can provide the answer.
Here are some questions to consider when evaluating whether you may be liable for CGT when selling your home:
What is a place for CGT purposes? The place or dwelling must be mainly residential. It can be a traditional home, cottage, apartment, unit in a retirement village, houseboat or a mobile home.
Is the place your main residence? Although there’s no single decisive factor here, you should consider the type of things that make a place a “home”. For example, some important considerations include:
Are your personal belongings in the home?
Do you have utility services (telephone, gas or electricity) connected to the address?
Is your mail delivered to the address?
Is this your address on the electoral roll?
There are many other factors to consider that vary depending on individual circumstances. Ask your Westlawn Business Services Accountant what factors might work to your advantage.
What is your ownership period? As mentioned above, the place must be your home for the whole time you own it in order to be fully exempt from capital gains tax. This is referred to as the ownership period. It generally starts on the date you get legal ownership under a contract and ends on the date of sale under a contract.
But there can be certain complications to this rule. For example, if after you buy a home, you cannot move in straight away for some reason. You generally may have to wait until you move in to claim the place as your home for CGT purposes.
What if I want to build a place on land I own? There are also specific rules if you build a place on land you already own. Generally, land by itself may not be considered a main residence. Only after you finish building a place and it becomes your home, can you claim the capital gains tax exemption when you sell. However, there are certain circumstances where you can treat land as your main residence.
Keep good records & consult your adviser if in doubt
It’s important to keep records of the documents and costs involved with owning your home. Even though your main residence is likely to be exempt from capital gains tax, it may not always be fully exempt. Good records are especially important in cases where you inherited the home or when a marriage breaks down and a home is transferred to one spouse.
Disclaimer Westlawn Business Services Pty Ltd provides this information for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation.