Contents
Introduction
Selling a property used for both rental and residential purposes brings several Capital Gain Tax (CGT) issues. You need to decide whether to apply the full CGT exemption to your original home or your new one, especially if you’ve rented out the original property after moving. This decision impacts your tax liability. With proper planning, you can take advantage of the CGT concessions to minimise any tax consequences. (CGT on mixed-use property Australia)
In some cases, you can apply strategies that allow you to retain tax benefits on both properties. Understanding how to use these concessions is key to maximising your tax relief. Whether you keep the original home as a rental or shift exemptions to your new home, professional advice helps you make the right decision.
Renting First, Living Later: CGT Concessions
If you rented a property first and later moved in, some CGT concessions might not apply. Planning ahead becomes essential if you intend to switch between rental and residential use. CGT concessions that reduce your liability may not be available if the property starts out as a rental. Proper timing and knowledge of the rules will help you avoid unexpected tax liabilities.
There are also specific CGT rules when an owner dies, and the property is sold by beneficiaries. These rules can reduce or even eliminate CGT if properly applied. Planning in advance allows you to benefit from these concessions and avoid unnecessary tax burdens.
Calculating CGT for Mixed-Use Properties
Calculating the partial capital gain or loss for properties used both as a rental and residence can be complex. You need to determine if you can use a market value cost and how to account for non-deductible expenses like mortgage interest. These calculations impact how you work out Capital Gain Tax.
Additionally, you must decide whether to write off any amounts for which you’ve claimed deductions, such as building write-off deductions. Surprisingly, even if you haven’t claimed certain deductions, they may still need to be included. To avoid issues, understanding how deductions affect your CGT liability is essential.
Partial capital gains on mixed-use properties may still qualify for the 50% CGT discount. This is a major CGT concession and often results in significant tax savings. Knowing how to apply these discounts ensures you minimise your tax liabilities.
Planning for Future CGT Implications
If you plan to buy a property for both rental and residential purposes, it’s crucial to plan early. For example, living in the property first, on a bona fide basis, allows you to access a concession that grants a full CGT exemption for up to six years. This can save you a significant amount in CGT when selling the property later. The key is ensuring that your residential use qualifies under the exemption requirements.
If you rent the property for more than six years and need to calculate a partial CGT exemption, you can often use the market value at the time you first rented it. This approach allows you to calculate the gain based on its rental value, reducing the taxable amount.
Conclusion: Expert Advice Is Key
As you can see, it involves various complex tax issues when selling properties used for both rental and residential purposes. From calculating partial exemptions to utilising the 50% CGT discount, each situation presents unique challenges. Seeking expert advice ensures that you fully benefit from the available concessions and reduce your CGT liability.
If you’re thinking of buying or selling a property for mixed rental and residential purposes, speak to us. We can guide you through the process and help you make informed, tax-effective decisions.
WL Advisory is a Chartered Accounting firm. We specialise in accounting, tax, and advisory services for individuals and small businesses. Please visit our website for more information. (CGT on mixed-use property Australia)