Avoid Tax: Leave Home

Sydney Morning Herald

Wednesday November 29, 2006

ANNETTE SAMPSON

The strategy To rent out my home without getting hit by capital gains tax if I sell it.

Can I do that?

Not indefinitely, but if you need to move out of your home for some years, it can be done. You probably think your family home, or principal place of residence, is capital gains tax exempt. But that exemption applies only if it's not used to produce income. If you rent it out - or use part of it as a place of business for that matter - the tax can apply. It will usually be calculated on the period the home was used to produce income or, if part of the home was used, the proportion of non-personal use.

So how can I rent it out and avoid CGT?

Les Szekely, the tax director at Horwath, says the rules allow a concession for temporary absences from your principal place of residence. If you rent out your home for less than six years before it is sold, you get the full exemption. According to the Tax Office, you have to have lived in the home to claim this concession. So it's not available if you buy a house, rent it out then move in later. But the six years is not cumulative. It applies for each period you rent out your home after living in it. So if you moved into your home for two years, moved interstate for four years, moved back to your home for a year, then moved overseas for five years before selling, the home should still be eligible for the principal place of residence exemption. But it would lose some of the exemption if you moved overseas without returning to live in your home. This is a boon for people who have to move around for their work, though you can't claim another property as your principal place of residence during this period.

What if I leave the home but don't rent it out?

Because you're not earning income from your home, the Tax Office says you can treat it as your principal place of residence for an unlimited period (again, bearing in mind that you can only claim one property as your principal place of residence at a time).

What happens if I rent out the home for more than six years?

If you first rented it out after August 20, 1996, the "home first used to produce income" rule will apply. The Tax Office says this rule assumes that, for tax purposes, you bought the dwelling at its market value at the time you first used it to produce income. According to Szekely, you can either get a professional valuation or calculate your own, based on reasonably objective and supportable data. He says that combined with the partial main residence exemption, this "double dip" can reduce your bill.

How does that work?

Szekely uses the example of Louisa, who bought a property in Sydney in 1994 for $250,000 and lived there until 1999, when she moved to Melbourne for work and rented out the Sydney house. In 2006, Louisa decided to stay in Melbourne permanently and sold the Sydney home for $1.25 million in order to buy in Melbourne. She had been absent from her home for seven years. At the time Louisa started renting out her home, a valuer estimates its value was $550,000. So her capital gain is $700,000 - not $1 million. She is still entitled to a CGT exemption for six years' absence, so her taxable capital gain is $100,000 (worked out on the number of days it did not qualify for the main residence exemption as a proportion of the total number of days she was absent). As Louisa held the property for more than 12 months, she is also entitled to the 50 per cent CGT discount, which reduces her capital gain further to just $50,000. Depending on her tax rate, the maximum CGT Louisa will pay will be less than $12,000. Szekely says the later valuation would not apply if Louisa had first rented out her home before August 21, 1996.