Tax Q&A: Can our family sell our home tax free?

Q: My partner owns a villa in Brisbane that she bought in 2004 for $130,000. It was bought as her first house and main residence up until late 2014. Subsequently, she moved into my house and rented her villa out, which was positively geared. It then ceased being a rental in August 2018 and remained empty as we were renovating it to sell. The estimated value of the property in 2014 was around $220,000, and currently it is valued at around $230,000.

My questions are:

• Because she lives in my house and her mail is directed to my house, does this make her property not her main residence?
• Is capital gains tax only based on the rental income, or on the profit made during the time it was rented out?
• Roughly how much CGT would she have to pay on the sale of her house?
• Will there be any tax implications related to my property if I were to sell, as she lives with me de facto?

Thanks for your help, Mathew

A: Your question hits on one of the most generous, and complex, sections of tax law: the ability of a family to sell their home tax free. This simple concept becomes complex when you throw life at it – we have greater mobility of our workforce, an evolving understanding of family, and even the concept of a ‘home’ can vary greatly.

Importantly, there is no one single point that will make a house your ‘main residence’.

Your overall lifestyle will be the deciding factor. Are you on the electoral roll at the address? Did your kids attend the local school? Did you have a housewarming? Do you have permanent employment in the area? Is the home listed for rent? A single item, like the direction of your mail, is only one piece of the puzzle. You will need to look at everything to understand when you are deemed to reside in a home.

Before you became a couple you both enjoyed the main residence exemption. And when you started a ‘marriage-like’ relationship, the main residence exemption would have been reduced to one home only. Inevitably, one of the houses that was capital gains tax free will now become taxable. 

When your family home starts generating rental income, you are deemed to have purchased it for the market value of the house when it first generated income. So, for your partner that was in 2014, when it was valued at $220,000. If she sells the home for $230,000, the total gain will then be $10,000. The price increase of $90,000 from 2004 to 2014 is tax free. Selling costs like the agent’s fees can reduce the profit even further.

The taxable profit of $10,000 is likely to enjoy the 50% capital gains tax discount. If your partner earns, say, $60,000, and she makes $10,000 profit on the sale, she will probably pay $1,725, looking at your limited facts. Your partner can also choose for the main residence exemption to apply to her old home, but this would mean you potentially lose the part of the main residence exemption when you sell your own home.

It is important to decide where you are going to use the main residence exemption. Matrimonial settlements will often nominate the home with the main residence exemption as part of the financial negotiations. It looks like your partner can sell her old home with very little tax payable. However, a discussion with your partner and a tax professional as to how this will apply is important.

Need to know

• Lifestyle is a significant factor in determining your main residence status.
• In a live-in arrangement where each partner owns a home, one of the properties could cease to be a main residence.
• The main residence exemption can be applied to either of the partners’ dwellings. 

Ross Forrester

is director of Westcourt

Family Business Accountants