Main residence capital gains tax exemptions can be complex. Your primary residence is your home and for most people holds a special place in their heart. When the time comes to sell your main residence, paying tax is often the last thing on your mind. However, it is important to understand in which scenarios the ATO will consider your main residence exempt from capital gains tax (CGT).
Our resident expert, Conor, starts with the common scenario of residences where a granny flat has been built on the property.
Capital Gains Tax Exemptions for Granny Flats
With a significant rise in the cost of property, as well as the increase in the cost of living, building granny flats has become more common. Perhaps you haven't built one yet but are considering your option for one at your primary residence. Approach this with caution and seek expert advice to understand your long-term tax obligations. Here I break down the scenarios where a CGT exemption for granny flats applies.
CGT exemption for granny flat arrangements
From 1 July 2021, capital gains tax does not apply when a granny flat arrangement is created, varied or terminated. A granny flat arrangement is a written agreement that gives an individual the right to occupy a property for life.
When does the CGT exemption apply to a granny flat arrangement?
A granny flat arrangement is exempt from CGT if it meets the following criteria:
the owner or owners of the property are individuals
one or more individuals have an eligible ownership interest in the property on which the granny flat stands
these owners and the individuals with the ownership interest enter into a written and binding granny flat arrangement.
What rules apply to the granny flat arrangement for capital gains tax exemption?
To be exempt from CGT, a granny flat arrangement must:
be in writing
indicate an intention that the parties are legally bound
not be commercial in nature.
Common scenarios where a granny flat interest is considered a commercial arrangement, is when rent is required to be paid at a market-related rate. However, if the individual with the granny flat is paying for electricity, water or similar actual household costs, then this is unlikely to be considered commercial in nature.
How can we help you with main residence tax exemptions?
At ABA. Advice Beyond Accounting we continuously attend training to ensure we are up to date on the latest tax regulations. This includes a comprehensive understanding of main residence capital gains tax exemptions. Along with all the complexity this entails.
We encourage you to reach out to us before you build or rent a granny flat, as well as before you sell your home, so that we can ensure you have an optimal tax outcome. Already building your granny flat or renting it out? No problem. We can still help. As expert tax accountants can advise you of the short- and long-term tax implications of your current situation. Contact us now for a free discovery meeting.