For most Australians, the family home is the major asset they leave behind. When any residential property is disposed of, Capital Gains Tax (CGT) is calculated on the capital gain made. CGT can reduce the value of your estate for future generations – so it is important to consider how to ensure your family home is subject to the CGT residential exemption when you plan for your retirement.
When is there an exemption on CGT?
Firstly, CGT does not apply if you acquired your home before 20 September 1985, but if major additions or alterations have been made,the CGT exemption may be lost or reduced.
There is an exemption on CGT if a property is your principle residence until death. This exemption can be extended if your spouse or a beneficiary nominated in your Will continues to occupy the home as their principal place of residence. The exemption continues indefinitely if the residence is left vacant.
It is important to be aware, however, that the exemption is lost if the residence is used to produce income for a period longer than six years. For example, if an owner moved into aged care accommodation, which became their principal residence, the exemption would continue if their home were left vacant.
If, however, the home were tenanted and produced rental income, the CGT exemption would end from the date of the first rental payment if the income-producing arrangement were to continue for longer than six years.
The exemption might also be lost if the home is not sold within two years of the individual owner’s death, though the Australian Taxation Office can extend the two-year period.
A partial CGT exemption may still be available if the residence was not the principal residence at death. The CGT is calculated using this formula: Non Main Residence Days X Cross Capital Gain = Taxable PortionTotal Days in Ownership