JUDGING by emails I receive, capital gains tax on the family home is causing a lot of confusion.
Your residence is free of CGT only if it is held in your personal names or in the name of one of you. If it is held by a family company or trust, there is no CGT exemption.
Confusion can arise when two properties are owned at the same time, because the tax treatment depends on the order in which they were occupied.
Case Study: A couple buy a property to live in, and then move out of it to another home, retaining the first one as a rental. It will be free of CGT for the time they lived in it, so they will be liable for CGT only on any increase in value from the date they moved out of it until it is sold.
Another person buys a property, rents it out and then subsequently moves into it. In this case, the CGT is assessed on a pro rata basis. Suppose they bought the property in 2005 and had it rented till 2009, when they moved in. If it was then sold in 2015 they would have owned it for a total of ten years. As it was rented out for four of those ten years CGT would be payable on four tenths of any gain.
You can rent out your home and be absent from it for up to six years without losing the CGT exemption, provided you don't claim any other property as your principal residence in that time. However, if you move to another property and retain the first, you do not have to make an immediate choice.
You buy a home for $450,000 in 2011 and live in it until 2015, when you buy another for $800,000 which you move into.
At this stage you do not have to nominate which house will be covered with the CGT exemption but you should still obtain a valuation of the first house when moving out of it, just in case you decide not to eventually exempt it.
Five years later, both houses are worth $900,000.
You wish to take the profit out of the first house, so sell it tax free under the six year rule.
This makes a portion of the capital gain made on the second house taxable, on a pro rata basis similar to the case study above where the property was rented out before it was lived in.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance.
His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: firstname.lastname@example.org.
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