Is the sale of your home really tax free?

Many people believe the sale of their main residence will be tax free but that isn’t always the case.  

A common question a property solicitor is asked is, “If I have more than one property, what sort of things does the Commissioner for Taxation look at in deciding which one is my main residence, and how long must I live in the property before it becomes capital gains tax free?”

Don’t let your expectations about a tax free sale carry you away, especially where the stardust has been sprinkled in your eyes by a real estate agent eager to make a sale in this difficult market.

It’s essential that you understand the basics on this issue, as a mistake can cost you dearly.

Remember, it will be you who will be left to pick up the pieces of the shattered expectations when you’re at the end of an Australian Taxation Office (ATO) audit a year or two down the track.

When an owner sells a property that has been their main residence throughout the whole time of their ownership and no part of it was rented out or used for producing income then the law is clear – any profit or loss is disregarded for capital gains tax purposes. 

That is, a profit isn’t taxable as capital gain and a loss can’t be written off against other income.

In a nutshell, there’s no minimum time period that a person must occupy their home to claim it as their main residence (except where a new residence is constructed for you; then you must reside in it for a minimum of three months) and it goes without saying that the longer you occupy it, the more likely the property is to be your residence.

Generally, it should be occupied for a minimum of 12 months, provided you don’t have a history of buying and selling properties that you claim are your main residence.

However, even then there are circumstances where the ATO will regard the properties as your main residence (for example, after three to six months if there are compelling reasons for you to move, such as employment, children’s education, health reasons etc.).

CHANGING MAIN RESIDENCE

The Taxation Commissioner allows an overlapping period of six months in which you can have two main residences, for example if you’re selling one home to move into another.

You may move into the second property while you’re trying to sell your first one.

To qualify for this exemption the first main residence must have been your main residence for a continuing period of three moths in the twelve months before it is sold and it must not have been rented out or used for any business purposes in any part of that twelve-month period when it wasn’t your residence.

Once you get past the period of six months and still own two properties then the Commissioner will only allow partial exemption from capital gains tax for one of the residences.

TEMPORARY ABSENCE

Once again, common sense prevails and the Tax Commissioner states that if a person stops using their property as their home they can choose to still treat it as their main residence and thereby keep it exempt from capital gains tax.

This applies when they don’t rent out the property at all during the time they weren’t living there, provided the property wasn’t also used at any time during that period for carrying on a business and/or generating income.

You also need to have no other main residence to qualify under this ‘temporary absence’ rule. 

Alternatively, if the property is rented for up to six years the Commissioner will allow you to treat it as capital gains tax free, provided you don’t have another main residence during that period.

If you rent it for longer than six years then its capital gain tax free status ceases after the end of the six-year period.

The cute question sometimes asked by investor clients who become intoxicated by the prospect of paying no tax on the sale of a property for a profit is: “Can I qualify for the capital gains tax free exemption if at the time I bought the property I had the intention to move in, but later didn’t move into the property as my home?”

The answer to this question is crystal clear.

You must actually reside in the property to obtain the benefit of the main residence exemption.