Do you need to pay tax on Principal Place of Residence (PPOR)?

Australia boasts one of the highest rates of home ownership in the world. As per the ABS (Australian Bureau of Statistics), almost 66% of Aussies live in the homes they own. This shows how much Aussies love to have a home of their own! But when homeowners have to sell their homes for any reason, they always face a dilemma about its tax implications. As a leading tax consultant in Australia, we deal with a lot of clients who throw this common question at us: “Do I need to pay family home tax?”So we decided to come up with a complete guide on family home tax along with an explainer about the exemptions too.
 

How are Aussie Family Homes Taxed?

There are basically three types of Family Home Taxes in Australia:

Capital Gains Tax (CGT) 

CGT kicks in when you sell your family home for any reason. You will be paying taxes on it as per the applicable rates. But if that property is your main residence for the entire period you owned it, you get a primary residence exemption from CGT. This means you get to keep all the gains you made from selling that property without paying any taxes!

Let’s understand this with a simple example. Imagine you have an annual income of $90,000, and you decide to sell your family home. If you make a capital gain of $1, 50,000 on that sale and the property was your main residence, your taxable income stays as it is (primary home exemption).

But if that property was not your primary home, your taxable income would skyrocket to $2,40,000. This will put you in a higher tax bracket, and you will be shelling out a lot more tax from your pocket. In such cases, it’s better to consult a tax and accounting expert like Nanak Accountants & Associates, who can help minimize your tax burden.
 

Capital Gains Tax Exemptions for the Family Home 

The ATO offers a CGT exemption for properties that qualify as the owner’s main residence under these conditions:
⦁ The property must be the primary residence of the owner and their family.
⦁ Personal belongings should be in the home.
⦁ The property should be listed as the owner’s mailing address and on the electoral roll.
⦁ Utilities like gas and electricity must be connected.

Apart from these conditions, there are some specific rules too for claiming primary residence exemption: 

Moving In and Out

You should move into the new home as an occupant as soon as practically possible after buying it or constructing it. You can also rent out the property temporarily without getting disqualified for primary home exemptions. 

Ownership and Inheritance:

This is a bit of a complex case. But putting it simply, if you inherit the home, you can get a primary home exemption if the property is in your name. There are also specific rules regarding the exemption in case of inheritance. For e.g., if the inherited property is in the name of a company or a trust, this exemption does not apply. 

Income Tax from Rental Earnings 

This is another family home tax that you have to deal with. If you are renting out a part of your home, the rent you get will be taxed as your income itself. So you will have to declare the income you are getting in the form of rent and pay the income tax on it (if eligible).

For e.g., you are renting out a section of the home for $350 per week. That would bring in an annual income of $18,200. While filing your tax returns, you will have to add this income as your taxable income.

Implications of CGT Exemption

When you rent out a portion of your property, it directly affects your CGT exemption. Reason? The reason is that CGT is applicable only on your main residence, and hence, you lose the CGT exemption on the portion you rent out. For instance, if you rent out 20% of the home for five years of a 20-year ownership period, that portion of the capital gain can be taxed (if applicable.)

Tax Deductible Expenses

While renting out a part of your home might increase your taxable income, there are certain tax deductible expenses that you can claim too. For example, a portion of the interest on your mortgage, utility bills, property taxes, and maintenance costs, proportional to the area rented out and the time it’s rented, could be tax deductible. However, you will need all the details to claim these deductions while filing your tax returns. So, make sure you keep a meticulous record of each of these transactions.

Land Tax 

Land tax is another important family home tax that you should be aware of. It’s a tax based on the value of the land where your property is. The Land Tax rate varies across all the states and territories. But if this particular property is your main residence, then you qualify for primary home exemption here, so no taxes! But if it’s not a primary residence, you will have to pay tax at the applicable rate; based on which state you are living in.

For example, if you live in Victoria, where the threshold for this tax is $600,000, and your property’s assessed value is $650,000, you will have to pay a land tax of $50,000.

How to Protect Your Family Home Centrelink Assets Test?

For retirees, the family home is not just a place of residence but also a significant component of their retirement planning, primarily because it is exempt from the Centrelink assets test. This exemption can greatly influence eligibility for age pension entitlements.
 

Impact on Pension Entitlements

If you are a retiree and selling your family home, it can have a major impact on your financial situation. If you do not use the proceeds from selling your primary home to buy another primary home or to pay for aged care accommodation within 12 months, ATO places those proceeds as your assessable assets. This can significantly impact your pension eligibility. So, before making such a big decision to sell your primary home, it’s critical to talk to experts. For e.g. at Nanak Accountants, we regularly help retirees maximize their tax savings and help with their pension entitlements by managing their primary home sales.

Treat your Home like a Strategic Tax Asset 

The tax-favorable status of the family home in Australia makes it a great tax haven for families and individuals. It offers excellent financial benefits like CGT exemptions and favorable treatment under the Centrelink assets test. However, as the matter of Family Home Tax is complex, we strongly recommend consulting an expert with extensive experience in the field. Only they can help you leverage the benefits of the exemptions without getting into any legal trouble. For more clarity, feel free to talk to our experts on the matter.