What are the tax and investment considerations for a Granny Flat above versus a Tiny Home below? Income Tax Return Reporting - Income Streaming Tiny Homes Tiny home ownership does not have to follow the ownership interest of the underlying property ownership. For...
Secondary Dwelling From December 2023 the Victorian Government has passed planning changes to make it easier to build Granny Flats - or "small secondary dwellings", on existing homes. The Victorian Premier Jacinta Allan revealed that planning permits will no longer be...
The ATO is particularly targeting property investors that are not using the help of a specialist property tax accountant like Umbrella Property Accountant, due to the high error rate being discovered from ATO Audits. The ATO Audits into self-preparers have uncovered...
What is the main residence (PPOR)?
Generally, a dwelling is considered to be your main residence if:
The length of time you stay in the dwelling and whether you intend to occupy it as your home may also be relevant.
To be your main residence, your property must have a dwelling on it and you must have lived in it. You are not entitled to the exemption for a vacant block.
A dwelling is anything used wholly or mainly for residential accommodation, such as:
A flat or home unit often includes areas that are physically separate, such as laundry, storeroom or garage. They are exempt from CGT on the same basis as the flat or unit. However, if you dispose of one of these structures separately from the flat or home unit (for example, you sell the garage), they are not exempt from CGT unless they were compulsorily acquired.
There are a number of CGT exemptions available for those that treat a home as their principal place of residence, they include
Generally when you build a new home or buy an existing home that you intend to repair or renovate before moving in.
The ATO will allow the home to be deemed your principal home for CGT purposes (no capital gains tax) provided you move in within 4 years from the time of the original purchase.
So if you buy a block of land and then build a home to live in, you have up to 4 years to complete the construction and exercise the right to call it your principal home and avoid any CGT if and when you sell, under S.118-150 of the ITAA 1997.
However to exercise the right to deem the home to be your principal home of residence you need to meet the following conditions
Please contact our office if you would like to review your personal situation to ensure your home is not subject to any Capital Gains Tax (CGT) when sold and if audited by the ATO.
If you rent out your principal place of residence that was acquired after the 20th of September 1985, there may be a CGT issue to consider!
Properties purchased before 20th September 1985 will not be subject to CGT regardless if rented out.
If your principal home is rented for the first time before 7.30 pm on 20 August 1996 and purchased after 20th September 1985, the CGT will be calculated on a pro-rata basis (ie) if owned for 30 years and rented for 10 years, 1/3 of the overall gain will be subject to CGT
If however your principal home is rented for the first time after 7.30 pm on 20 August 1996 and purchased after 20th September 1985, the Market Value Substitution Rule will apply S.118-192 of the ITAA 1997, (ie) the property is valued for CGT purposes as its Fair Market Value on the day it was first rented ( you will need a valuation). The CGT is calculated on any increase in value from this point. A further point to note, the 50% CGT discount only applies after 1 year and 1 day after the date of the contract.
In addition, there is the 6-year rule, if you move back into your principal home before 6 years of renting it out, then CGT may be ignored provided you have not elected any other home as your principal place of residence. The ATO only allows one property to be your principal home at a time, the election is indicated by how you lodge your tax return.
Another common mistake is that CGT is calculated from the date of the contract not the date of settlement, some people assume that a sale before the 30th June that settles after the 30th June, pushes the CGT into the following year, unfortunately incorrect.
The 6-month rule states that where a taxpayer acquires a new dwelling that is to become their main residence, and the taxpayer still owns their existing main residence, both dwellings can be treated as the taxpayer’s main residence for a period of up to 6 months.
For CGT purposes, your home qualifies for the main residence exemption from the time you acquire it, provided you move in as soon as practicable.
If you buy your home, the ‘time you acquire it’ is the settlement date of the contract.
If:
The 6 months rule for CGT may not be aligned with any State Stamp Duty Concessions, for example, Qld State Stamp
If you acquire a new home before you dispose of your old one, you can treat both as your main residence for up to 6 months.
You can do this if all of the following are true:
A client inherited a property from her late parents which was used as their Principal Home. The parent’s family home has been transferred to her as part of the estate. The two year period is now coming due as such she needs to determine what are the capital gains issue if she sells before the 2 years from the date of death is up, or if not what is the apportionment for CGT thereafter.
Full Exemption
Under section 118-195 ITAA 1997, a full exemption can apply on the sale of a dwelling inherited from a deceased individual if the property was the deceased’s main residence just before their death and was not being used to produce income at that time and either:
Partial Exemption
The partial exemption rules in sections 118-200 apportion the capital gain based on the number of days that the property was not the main residence of the beneficiary since it was acquired from the deceased if this period is over 2 years
How to calculate the Partial Exemption under CGT
Example: Part exemption
Vicki bought a house under a contract that settled on 12 February 1995 and used it solely as a rental property. When she died on 17 November 1998, the house became the main residence of her beneficiary, Lesley. Lesley sold the property under a contract that was settled on 27 November 2016.
As Vicki had never used the property as her main residence, Lesley can’t claim a full exemption from CGT. However, as Lesley used the house as her main residence, she’s entitled to a partial exemption from CGT.
Vicki owned the house for 1,375 days and Lesley then lived in the house for 6,586 days, a total of 7,961 days. Assuming Lesley made a capital gain of $200,000, the taxable portion is:
$200,000 × (1,375 ÷ 7,961) = $34,544
As Lesley is taken to have acquired the property before 21 September 1999 and entered into the contract to sell it after that time and held the property for at least 12 months, she can use either the indexation or discount method to calculate her capital gain.
If you dispose of your ownership interest in the dwelling within two years of the person’s death, you can ignore the main residence days and total days during your period of ownership.
You ignore any non-main residence days before the deceased’s death if:
The 2 year period is calculated from the date of death to the date of settlement rather than the date of the contract of sale of the deceased parents’ home.
Example: Continuing main residence status
Aldo bought a house in March 1995 and lived in it. He moved into a nursing home in December 2010 and left the house vacant. He chose to treat the house as his main residence after he ceased living in it, under the ‘continuing main residence status after moving out’ rule.
Aldo died in February 2016 and the house was passed to his beneficiary, Con, who used the house as a rental property.
As the house was Aldo’s main residence immediately before his death and was not being used to produce income at that time, Con can obtain a full exemption for the period Aldo owned it.
If:
Use the flowchart link to work out if your inherited dwelling is exempt from CGT.
If you are a foreign resident, you are not entitled to the main residence exemption from capital gains tax (CGT) for the property sold after 30 June 2020, unless you satisfy the requirements of the life events test.
If you are an Australian resident at the time you dispose of your property this does not affect you.
On this page
When you dispose of your residential property, you satisfy the requirements of the life events test if both of the following are true:
If you satisfy both these criteria and meet the general requirements for the exemption, you can:
You do not need to apply the life events test to a property that you:
You can claim the main residence exemption if you meet both of these requirements in addition to the general requirements for the exemption.
If you were not an Australian resident for tax purposes while living on your property, you are unlikely to meet the requirements for the CGT main residence exemption.
If you dispose of your property under a contract, the disposal time is when you enter into the contract. If there is no contract, the disposal time is when you settle.
If you are a foreign resident for tax purposes when you die, these rules also apply to: