Spring has arrived and the property season is well underway! Over the next few months, thousands of Australians will enter the property market to buy or sell. Whether you’re upsizing, downsizing, tree-changing, sea-changing, moving closer to family or moving from family, the chances are you haven’t given much thought to the tax implications of selling your house. After all, selling your main property is tax-free, right? Well, that’s not always the case.

The basics

If you sell your main residence, the basic rule is that there is no capital gains tax (CGT) payable on any profit you make. That’s good news for you, and the reason why people rarely consider their tax position when they sell.

However, as people’s business habits are increasingly changing to include running a business from home and/or earning income by letting out spare rooms, many Australians are unknowingly putting some of that tax exemption in jeopardy.

Have you used your home to earn income?

In today’s market, people are using their home to produce some type of income. That could be by renting out part or all of the property, or by running a business from home. If you tick one of those boxes, you may be forsaking part of your CGT exemption. This is because you can’t typically obtain a full main residence exemption if you used any part of your home to produce income during all or part of the period you owned it.

People who simply work from home as part of their job (such as teachers who might do some marking in the evening or anyone else who might do a bit of overtime away from the office) are not affected.

If you are affected by the exemption, either you or your accountant will need to calculate how much of the profit on disposal of your house is taxable. In most cases, this is the proportion of the floor area of the home that is set aside to produce income and the period the home was used to produce income.

Read the following simple case studies to understand exactly how this works:

Running a business

Greg runs an IT consultancy from home as a sole trader, in addition to his day job working in IT for a major corporation. He undertakes projects working largely in the evenings and at weekends and converts a spare bedroom in his 3 bedroom house into an office, from where he runs his business.

He bought his house in 2006 for $500,000 and sells it in 2016 for $1,000,000. He estimates that approximately 10% of the floor area of the house is used in his home-based business. He commenced the business in 2011.

Ordinarily, the $500,000 profit on sale of his house will be exempt from CGT. However, for 5 years of the ownership period, he used 10% of the property to earn assessable income. This means that $500,000 x 10% x 50% of the gain ($25,000) will be taxable.

Renting a room through Airbnb

Jill bought a three-bedroom apartment in Sydney in 2010 for $400,000. To help pay the bills, in 2014, she rented out one of the bedrooms through Airbnb. She estimates that including access to shared areas like the lounge and kitchen, 40% of the floor area is given over to earning assessable income through Airbnb. In 2016, she sells the apartment for $800,000.

Ordinarily, the $400,000 profit on sale of the apartment will be exempt from CGT. However for 2 years out of the 6 year ownership period, she used 40% of the property to earn assessable income. This means that $400,000 x 40% x 33% of the gain ($52,800) of the gain will be taxable.

Renting out the whole house whilst temporarily working away from home

Bob bought a house in Perth for $500,000 in 2005. In 2012, he was employed to work in the mines in a remote area of Western Australia. He was provided with rental accommodation in that remote area by his employer. Whilst away, he rented out his whole house in Perth. In 2016, he sold the house for $1,000,000.

Ordinarily, the $500,000 profit on sale of the house will be exempt from CGT and that is indeed the case here. Tax law allows you live away from your home and earn assessable income from renting it out for up to six years (the six year absence rule) without losing the main residence exemption, provided you don’t acquire another main residence in the meantime. As Bob lived in rented accommodation whilst absent, he can take advantage of the six year rule and claim a full exemption from CGT on the sale.

Renting out the whole house and buying another

Amy bought an apartment in Melbourne for $300,000 in 2010. In 2012, she took a job in London and moved overseas, renting out her Melbourne apartment. Shortly after moving to London, she bought a new flat in the city and has lived there ever since. She has no intention in the short term of moving back to Australia and accordingly, sells the Melbourne apartment in 2016 for $600,000.

Ordinarily the $300,000 profit on sale of the apartment will be exempt from CGT but that is not the case here. Amy cannot take advantage of the six year rule since she acquired a new main residence (the fact that it was overseas is not relevant). Accordingly, she can claim the main residence exemption for the period she lived in the apartment (2010 to 2012) but not the period since she acquired the London apartment (2012 to 216). $200,000 of her profit will be chargeable to capital gains tax.

Need help with your tax return?

H&R Block can help you and your spouse or family member get your tax done. Find your local H&R Block office and book an appointment online before the 31 October deadline.

Book Now

Need help with your tax return?

H&R Block can help you and your spouse or family member get your tax done. Find your local H&R Block office and book an appointment online before the 31 October deadline.

Book Now