The rules regarding the capital gains exemption for your main residence have changed, which could impact your current situation (if you’re not aware of them).
You may already be aware that purchasing a house to live in as your main residence will result in no capital gains tax when you eventually choose to sell it. Your main residence could prove to be a very tax-effective investment, but there are strict rules surrounding how to claim this exemption.
Under the new changes, only Australian tax residents may be allowed to claim the main residence exemption. Not only that, but they are also the only eligible residents to claim the 50% discount for any capital gains they make on assets that they have held for more than 12 months.
Many people may leave Australia to move to low tax countries. In the case of ownership of a former main residence in Australia, the tax savings you could make in the move could get eaten up if you sell that main residence after you cease to be an Australian tax resident.
For example, Joanne buys her property in Sydney in 1997 for $300,000 and has lived in it since. It is now valued at $1.3 million. She is about to move overseas and will cease to be a tax resident. If Joanne sells the house before moving overseas, she will pay no tax on the $1 million capital gain from selling the house.
The most common scenario that can occur though is that the owner keeps the house (their former main residence) and rents it out.
In this scenario, Joanne would pay a higher, non-resident tax rate of a minimum of 32.5% on the rent that she earns. When she sells the house, she will pay tax on the entire capital gain. If she sells the house when she is a non-resident, she will receive the entire $1 million, have it added to her income and then will be taxed. In order to sell that was previously tax-free, she would likely receive a sizable tax bill of $400,000.
If you are thinking of moving overseas, modelling the cost and benefit of keeping your main residence as an investment in Australia is something that we can assist you with.