FocusOn - Taxation and your home

Generally, expenses relating to your family home are not deductible. Similarly any profit you gain on its sale is not included as part of your income and does not attract capital gains tax. This applies as long as your home is:

	Not used to generate assessable income, i.e. rent
	Used solely for private purposes, and
	Used as your main residence
	Not used in carrying on a business

To satisfy the exemption from capital gains tax upon the sale of your family home that was acquired after 19 September 1985, the property must be your main place of residence throughout the period of ownership. A taxpayer can only have one main residence. However, a six-month overlap (between the time of acquisition of the new and disposal of the old) is permitted when you are changing homes.

The main residence exemption is not affected by merely claiming home office running expenses. Please refer to our Focus On Home Office Expenses for more information. However, using your home as a place of business or using it to derive income will result in a partial loss of your main residence exemption.

Examples of income-producing purposes include:

	Deriving rent from tenants
	Providing medical services from a home-based surgery
	Providing a car or TV repair service
	Providing day care, or music or swimming lessons

When your home is no longer your main residence

When a dwelling is used as a main residence during some of the time it is owned, a portion of the gain on sale will subject to capital gains tax. This may occur when the main residence is later rented out, or is used to accommodate a home-based business. If the main residence exemption ceases to apply, the capital gain on sale of the property is calculated from the date the main residence exemption is lost to the date of sale. A valuation of the property is required at the date it is no longer your main residence.

Should a property temporarily cease to be the main residence, the dwelling may still be treated as the main residence provided no other residence is treated as such during this period. An example of this is being transferred interstate and renting a dwelling there to live in whilst also renting out your main residence. If the residence is rented, this exemption from capital gain tax is available of up to six years for each absence. If the residence is not used to derive income the main residence exemption can continue indefinitely.

In any event, we recommend clients obtain the market value of their main residence at the commencement of their absence no matter how temporary it seems, as a market valuation is significantly more difficult after the event. This estimation does not need to be a sworn valuation.

Loan funds & interest

Interest on a loan is deductible where the loan was drawn for an income-producing purpose, for example for the purchase of a rental property.

Interest on loans that are secured by a main residence but are used to purchase an income-producing investment will still be deductible. It is important to note that interest can only be claimed on the portion of the loan that is used for the income producing purpose. If you borrow against your house to purchase shares and pay for a holiday, only the portion relating to the shares will be deductible.

Please note that where an investment loan has further private drawdowns the calculation of deductible interest is extremely onerous. We recommend that you do not make private drawdowns on investment loans. Our financial planning team can advise you on structuring investment and private loans.
Interest on a mortgage loan used to acquire a private home which is secured by a rental investment property will not be deductible. It is not the security of the loan that is relevant, but rather the use of the funds.

Renting out your family home

The assessability of income, deductibility of expenses and likelihood of capital gains tax on disposal are issues for consideration. We recommend that clients obtain a market valuation of their main residence at the time they commence renting it out. Market value rather than cost is the appropriate basis for calculating capital gains or losses where the property is first rented after 20 August 1996.

Holiday houses

Properties such as holiday houses are often used for both external rental purposes and for private use. Expenses must be apportioned between rental and private use. The key question for taxation of holiday homes is ‘how available for rent is the property?’ Available for rent requires more than being vacant. It implies being advertised with real estate agents at market rates.

Board

The payment of board by a family member or relative is usually a domestic arrangement that is not intended to be profitable. The payments will not be assessable income and no deductions are available. The same will apply where friends staying with you agree to specifically reimburse their portion of costs incurred. The more commercial the arrangement the more likely it is that taxation issues related to the situation will need to be addressed.

Published : 6 July 2007