Capital Gains Tax
Capital Gains Tax will normally apply on the sale of investment properties. There are also circumstances where the capital gain may be exempt (Main Residence exemption) or apportioned (usually due to the Principle place of residence exemption or receipt from deceased estate).
Capital Gains can be a very complex topic so advice must be sought for individual circumstances. However, we can explain some basic principles of Capital Gains Tax relating to residential properties. With knowledge there is also planning opportunities if taxpayers know their circumstances are going to change.
The Temporary Absence Rule – Extending the Main Residence Exemption.
Where a dwelling ceases to be used as a taxpayer’s main residence, the taxpayer can chose to continue to treat the dwelling as their main residence for all or part of the period that they are not living in the property for a period of up to six years.
The six year exemption rule only applies for the period the property is the “Main Residence”. A taxpayer can still apply this rule if they acquire another property, even if they live in it. The catch is there is no “Main Residence” exemption attached to the second property which makes it subject to Capital Gains Tax (CGT).
Reduced Cost Base for Properties acquired after 13 May 1997 where Capital Works Write-off claimed.
7.30 pm on 13 May, 1997, was a critical time for CGT. For properties acquired after that time, the “Cost base” of the asset is reduced for capital works deductions claimed. An exclusion to this is deductions for capital works expenditure incurred after that date and prior to 30 June 1999, where the property was acquired prior to 7.30 pm on 13 May, 1997.
In brief, the amount claimed for capital works deductions are applied to reducing the cost base which makes the amount of capital gains higher and may result in a higher amount of Capital Gains Tax.
If you owned the property prior to 7.30 pm on 13 May, 1997 there is no adjustment to the cost base.
Main Residence used to Produce Income for the First Time after 20 August 1996
Where a taxpayer’s main residence is first used to produce income after 7.30 pm on 20 August 1996, the taxpayer is generally deemed to have acquired the property, for CGT purposes, at the market value at that time. This means for main residences converted to income producing after 20 August 1996, a capital gain or loss is calculated on the market value at time of conversion and the sale price when subsequently sold.
Valuation where status of residence changes from Main Residence to Income Producing.
As a final note on CGT, where usage of a property changes from Principle place of residence and rental, or vice-versa, taxpayers should obtain a valuation as at that date. A valuation from local Real Estate Agents should be sufficient, but a valuation from a licensed valuer is recommended.
Post by Guest Writer David Maynard – CEO of My Tax Zone
Filed Under: Tax Tips
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