Coping with CGT rules

By

Published on

The family home is the only capital gains tax-free investment available to Australians. Make a $300,000 profit when you sell your home and the taxman gets not one cent.

Make a $300,000 profit on any other investment and the taxman's take will range from $22,500 to $67,500, provided you have owned it for more than 12 months. But rules regarding what constitutes the main residence can be confusing, as Money reader Eric points out.

Home owner Eric plans to buy an investment property. He wants to know if he can turn his family home into an investment and live in the one he buys. And if he does, what happens to his main residence CGT exemption?

Rule one is you can only have one property with main residence status at any one time. Usually this is the home you live in but, in some cases, you can choose to have a dwelling treated as your home for CGT purposes even if you no longer live in it. But you can't make this choice for the period before a dwelling first becomes your main residence.

So Eric can turn his family home into an investment and still claim a total or partial CGT exemption on it. He will not have to pay CGT until he sells one of the properties, and it is only then that he needs to decide which one to nominate as his main residence.

So let's say after six years Eric sells his original family home for $500,000. It was valued at $250,000 when he first rented it out (these amounts have been adjusted for allowable costs). In the same time the value of his new home has gone from $300,000 to $400,000. He is likely to confer main residence status on his first home and avoid paying CGT on $250,000. When he sells his current home he will have to pay CGT on that for the six years it was not his main residence, but that is on a lesser amount of $100,000.

The six-year rule allows you to rent out a property you have first lived in for six years and still claim it as your main residence. After six years you need to move back into it for a period to keep on claiming it as your PPOR.

And if Eric renovates a property that he later pays CGT on he wants to know what the cost base will be for CGT calculations. The cost of the capital works minus total depreciation claims over them will be added to the purchase price to establish the cost base.

So for example if Eric does capital works amounting to $50,000 but has claimed $2500 in depreciation relating to these, he will be able to adjust his cost base upwards by $47,500 to reduce the CGT.

Get stories like this in our newsletters.

Related Stories

TAGS

Money's founding editor Pam Walkley stepped down in early 2015 after more than 15 years at the helm. Before that she was at the Australian Financial Review for 11 years, holding several key roles including news editor, chief of staff and property editor. Pam is now a senior writer for Money.