Your main residence, being your home, is generally exempt from capital gains tax (CGT). Due to recent legislation changes, many foreign residents may now be ineligible for the main residence exemption.
What is the main residence exemption?
CGT is a form of tax that’s payable on the capital gain made from the sale of an investment, and your main residence is generally exempt from CGT. The Australian Taxation Office (ATO) has several requirements that must be met for a house to be considered a main residence.
Changes to the main residence exemption
Since the mid-1980s, foreign residents have claimed the main residence exemption on their home that is used as an investment for no longer than six years at a time. However, this policy was flagged in the 2017-18 federal budget, with recent legislation changes impacting the eligibility of the exemption for foreign residents.
Following a lengthy policy review, the legislation change was passed through the Senate in early December 2019. The date of purchase determines when the change applies to the specific residential property.
If the property was purchased on or after 7:30pm 9 May 2017, the CGT main residence exemption no longer applies for disposals from that date. Meanwhile, if the property was held prior to this date, affected owners can only claim the exemption up until 30 June 2020. Owners who satisfy the ATO’s life events test will not be impacted by the change.
This change only affects the property owner if they aren’t an Australian resident for tax purposes at the time of residential property’s disposal. In the case where the property owner returns to Australia, becomes a resident for tax purposes and sells the property, they will be eligible for the exemption.
Depreciation and your main residence
Both capital works and plant and equipment depreciation can only be claimed for income-producing properties. Therefore, you can’t claim depreciation on your main residence.
If the owner uses part of their home for income-producing purposes, such as renting a room through Airbnb or using part as a home-based business, some depreciation deductions are available. In this scenario, depreciation can only be claimed at a pro-rata basis, based on the income-producing percentage of the property.
It’s important to note that when part of your main residence becomes income-producing, you could be ineligible for the full CGT main residence exemption. Furthermore, any depreciation claims on the property can decrease your cost base, which affects the payable CGT. Calculations of CGT are very complex, and we recommend speaking with your accountant before the sale of your property.
To learn more about depreciation and how it can affect your property’s cost base, contact the expert BMT Team on 1300 728 726.