Taxing the Family Home

Disclaimer: The above information is intended to be of a general nature. Please do not rely on any of the content as being a professional tax or legal opinion and seek your own independent advice.

Everyone probably knows that under current law any capital gain made when selling the family home is not taxable. However, there are some circumstances whereby selling your “primary residence” could be subject to capital gains tax.

Buyers ought to be cautious, for example, when purchasing the family home as a “trustee for a trust” especially when it comes time to sell. This is because, in general, the tax rules enable only individuals residing in their home to generate a tax-free gain when selling. Indeed, sellers have the onus to prove that the sold property is in fact their primary home. Holding utility accounts in your name, having your possessions in the property and sharing the home with your family members are all examples of “proof of residing”.

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The question is often asked if “selling off the back yard” is subject to capital gains tax. In short, the advice I have read indicates “yes it is”. This is because the principal residence tax exemption applies only to a “house” with the land. The original cost of buying the property is normally able to be deducted to determine any profit in such circumstances and the gain discounted by half if the land is held for more than twelve months.

When deciding to relocate the family for a period and rent the primary residence, property owners have the right to return to their home within six years and retain the tax exemption when selling. The exemption applies only when the seller did actually reside (intention to reside is not sufficient) in the property and did not purchase and live in that other home during the period of renting the original house.

For those who have inherited a house from a deceased family member the rules are more complex although normally for a recent inheritance the profits from the sale of the property is tax-free if the property is either sold within two years of the person’s death or the home becomes the main residence of the beneficiary under the will. You need to be more cautious in these circumstances if you rent the property at any time.

In unordinary circumstances it is worth checking with your accountant or tax professional before selling your home to ensure any gain you make is safe from the Taxman.

Finally, with Stamp Duty an obvious barrier to property transactions at $18,715 for a home at Perth’s median house price there is some consideration being given to creating a “level” land tax to all properties including a primary place of residence. Currently exempt from Land Tax, taxing the family home as well as investment properties could be structured so that transfer duties be abolished creating a more stable tax base for the government.

By Hayden Groves
REIWA President
REIA Deputy President

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