Navigating capital gains tax (CGT) when you own multiple homes can be a difficult task. CGT is a tax on the profit made from the sale of an asset, such as real estate. The Australian Taxation Office (ATO) allows for a CGT exemption when selling a principal residence. When you own many homes, however, the laws governing the CGT exemption might become overcomplicated.
If the disposal of an old home takes more than six months, the principal residence exemption applies to both properties only for the six months preceding the disposal of the old property. This means that if a person owns two homes and sells one, they can only claim the CGT exemption for the last six months they owned the previous home. Previously, when the homeowner owned both residences, they could pick which one to consider their principal residence. During that time, the other property will be liable to CGT.
Meet Sarah and Michael. They owned two homes over the course of their residency. They lived in their original home from January 1st, 1999, until January 1st, 2021, when they purchased a new one. Upon moving, they chose to hold on to their old property, which generated no income. Fast forward to October 1st, 2021, they sold their old home after owning it for 8,310 days.
During the last six months of owning their old home, from April 1st, 2021, to October 1st, 2021, both houses qualified as their primary residence. However, for the first 91 days of the year, only one of the homes can be considered their primary residence. This is because they owned two properties and were living in one of them as their primary residence for that period.
By understanding the rules of primary residence and capital gains tax, Sarah and Michael were able to maximize their tax benefits when selling their old home. It’s important to consult with a tax professional to ensure you’re making the most of the tax laws and exemptions available to you.
Homeowners have two options for claiming the main residence exemption for their new home while still receiving a partial assessment for Capital Gains Tax (CGT) on their previous home. The assessable proportion is calculated by dividing the number of days the old home was not their principal residence by the total number of days they held the former home. This means that if the homeowner only stayed in the previous property for a limited time, they can only claim the CGT exemption for the time they used it as their principal residence.
Alternatively, they can treat their previous property as their principal residence for a set length of time, making it completely exempt from CGT. If they sell their new property, they will be liable for CGT for the time they deemed their former home to be their primary residence. This means that if a homeowner continues to regard their former property as their primary residence after moving out, they cannot treat their new home as their primary residence for up to six months while relocating.
Finally, managing CGT for many properties might be a difficult procedure. Homeowners must examine how long they have owned each property and how long they have lived in each as their principal residence. Seeking professional counsel from a financial advisor or tax specialist can be beneficial in comprehending the requirements and assuring ATO compliance.
Navigating capital gains tax for multiple properties can be a challenging and complex process, but with the help of a professional accounting firm like Aero Accounting Group, you can be confident in your decisions and ensure compliance with ATO regulations. Our team of experienced accountants can provide more details about the article and work with you to develop a tailored tax strategy that meets your specific needs. Don’t hesitate to contact us today and let us help you take control of taxes.