Property tax traps that could cost you thousands in CGT

With the dramatic increase in the value of the family home, the capital gains tax (CGT) main residence exemption is more important than ever. Imagine selling your home and not having enough to buy another one after paying CGT.

The main residence exemption is not a given as one family found out when the tax office successfully argued that their electricity bill was too low for them to be actually living there.

If you think you might have fallen for one of these traps, make sure you’ve kept good records of all your expenses.Credit: AFR

In that 2007 case, the Administrative Appeals Tribunal ruled that the family spent most of their time at their daughter’s place, so they could not cover their home with their main residence exemption.

Here are just a few traps that could cost you thousands in CGT:

Name not on the title: It might be held in a trust or company name or maybe your parent’s name, but they don’t live there. Unless it can be established that the property is held in a bare trust for you, it cannot be covered by your main residence exemption.

Renting out a room or Airbnb while you are on holidays: If part of your home is used to produce income, that area cannot be covered by your main residence exemption for the time it is used that way.

The same problem arises if you rent out the home while away on holiday. Some people mistakenly think they can use the “six-year rule” to cover the home while it is producing income. This rule requires you to be absent from the property. That is living somewhere else, not just holidaying.

Selling your Australian home while living overseas: That is all it takes for you to lose your main residence exemption right back to the day you purchased the property. Once you become a non-resident for tax purposes, returning for a holiday to sell it will not resolve the problem.

Not actually living there: Let’s say, for example, your are transferred before the house settles, so you never get to move in. The six-year rule can’t protect you then either.

Young people buying a home while still living with their parents should live in the house first for at least three months. Another trap is having a home provided by your employer that would be considered your real home base.

Having the name of someone not living there on the title: If they technically own half the house then half of the house is not protected from CGT. This happens when parents help their children buy a home or make their unmarried child a joint tenant to make sure they have somewhere to live if the parent dies. Later the child may move out.

If this has happened, and you try to fix it, after the fact that transfer is deemed to be at market value so CGT is already accruing.

Demolish the house: Except for accidental destruction, the sale of vacant land cannot be covered by your main residence exemption. This is the case even if the dwelling has been there for 30 years. There must be a dwelling included in the sale. Though this can be a caravan you have been living in.

If you are caught out, you need to ensure you are keeping good records to keep the capital gain to a minimum. If you purchased the property after August 20, 1991, you are entitled to increase its cost base by holding costs such as interest, rates, insurance, repairs and maintenance. This could even include cleaning materials and lawn mower fuel.

Just as long as the expenses have not otherwise been claimed as a tax deduction they can increase your cost base even though they are private in nature.

Julia Hartman founded BAN TACS Accountants over 30 years ago and is still passionate about all things tax.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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