With the hustle of property season afoot, one of the more important aspects that most home sellers forget is their tax position.
According to Mark Chapman, the Director of Communications at H&R Block, selling your main property remains free of capital gains tax. Still, numerous home sellers are putting that tax exemption in danger when they utilise their property to make revenue through renting out part or all of the home or operating a business from home.
“If you check one of those boxes, you may be forsaking part of your CGT exemption. This is because you cannot normally acquire the full primary residence exemption if you have utilised any part of your property to turn an income throughout all or part of the time in which you owed it,” said Chapman.
Chapman gave a number of scenarios for the desertion of this tax exemption. For an individual operating a business from home, the seller has to approximate the percentage of the floor area of the residence that is being put to use for the home-based business, as well as the duration of time that they are running the business at home. This also applies to homeowners leasing out a room.
For someone renting out their entire house while provisionally working away, tax law permits them to use the six-year absence regulation. This requires living away from home and earning revenue from letting it out for up to six years, as long as they do not acquire another principal residence in the meantime.
Chapman suggests sellers seek advice from an accountant to gain knowledge on exactly how much tax they are required to fork out.
“Either you or your accountant will have to do a difficult calculation to figure out how much of the profit upon disposal of your property is liable to be taxed,” he said.
“In most circumstances, this is the proportion of the floor area of the property that is set aside to make income and the time the home was utilised to produce revenue.”
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