Tax Q&A: What do I have to do before renting my home?

I bought my PPOR in Queensland in January 1997 and lived there with my partner (we are not married) until December 2018. The house is in my name alone. My partner recently inherited a house in Queensland and we wish to move there. This house is in her name only.

My questions are as follows:

• Can I rent out the home that is in my name using the six-year rule? (We may not like where we are moving to and so we wish to try it out fi rst before making it our main residence).

• What do I have to do before renting my home (eg a valuation, a depreciation schedule)?

Thank you, Su

Establishing a property as a main residence (MR) by occupying it immediately after purchase will make it exempt from capital gains tax (CGT) when later sold. The exemption from CGT can be extended for another six years, under the ‘Absence Rule’. So, if sold at a capital gain within those six years, there should not be any CGT liability – the condition is that no other property can be nominated as the MR during that period of ownership.

Where a property is initially established as an MR and later rented out for a short period, say four years, followed by reoccupying it after the four years, it continues to be exempt. Relocating for a short while and returning to occupy the original dwelling also resumes the MR exemption

The question is, what is the status during the period of absence?

An established couple who are married or de facto are considered a family. Moving from one dwelling owned by one partner to another owned by the second partner indicates that it is now the MR for both. Where this is the case and each partner has a property they wish to nominate as an MR, the exemption for that period will be split. 

Capital gains is calculated as the difference between sale price and cost base. The cost base for a property that was previously only an MR will be the market value when it was first rented out. A valuation obtained at that point in time is helpful to the valuer as they can see the property’s condition, rather than having to use photos. However, a valuation can be obtained from professional valuers when needed in the future.

While forward planning is important, nominating a property as an MR is usually finalised on completion of the tax return for the year in which the sale is made. Checking the facts to complete the tax return will enable you to ask ‘what if’ questions, including:

-How much CGT liability is there on the original dwelling if the second property is nominated as the MR from now to the future?

-How much CGT is likely if the new dwelling is considered an investment instead of an MR at the point of sale?

-How much capital growth potential is there for each of the properties?

Answering these questions for the year in which there is a sale some time in the future means there is ample time to look at the facts, estimate various positions and then take the decision as to which property to nominate as MR, minimising the tax position. 

Note that whatever decision is made on the first sale will impact on the status of the second property. Advice should be taken before completing the tax return in the year reporting the first sale. 

On renting the home, a depreciation schedule would allow additional deductions against rental income, where the property was constructed after 19 September 1985. 

Need to know:

• A property that is vacated for a short time may remain CGT exempt on reoccupancy.
• An established couple (married or de facto) are considered a family
• In nominating a main residence, consider capital growth potential.

   

Shukri Barbara

Principal adviser at Property Tax Specialists