Property Investing

This month’s Wealth Pipeline is an eclectic discussion covering some of the lesser known intricacies of property investing from a tax perspective.

Property Investing

The main residence exemption

One of the most important and valuable assets that an individual will ever purchase is their own home. From a tax perspective, one of the biggest advantages of a taxpayer owning their own home is the main residence exemption. Under the main residence exemption, any capital gain (or capital loss) on the disposal of a taxpayer’ home will generally be disregarded. However, the exemption is not easily applied, because there are many exceptions and intricacies that need to be considered.
Some of the exceptions and intricacies include:

• The area of land that may be exempted is limited to two hectares,
• Vacant land may be treated as your main residence if it is vacant because your home has been destroyed, and
• As a general rule, a dwelling is no longer your main residence once you stop living in it.

The six year rule

Where a dwelling ceases to be occupied as a taxpayer’s main residence (i.e., the taxpayer moves out), the ‘temporary absence rule’ allows the taxpayer to choose to continue to treat the dwelling as their main residence for all or part of the period that they are not living in it.
The period during which the ‘temporary absence rule’ applies is as follows:

• For any period the dwelling is not used for income producing purposes when the taxpayer moves out – the taxpayer can treat the dwelling as their main residence indefinitely; or
• For any period the dwelling is used for income producing purposes (e.g., it is rented out), the dwelling can be treated as the taxpayer’s main residence for a maximum period of six years.

Where a taxpayer makes the choice, they cannot generally treat any other dwelling as their main residence during the period that the ‘temporary absence rule’ applies.
The temporary absence rule can only apply if a taxpayer’s dwelling ceases to be used as their main residence. Implicit in this condition is that a dwelling must first become the taxpayer’s main residence. That is, a taxpayer cannot cease to use a dwelling as their main residence if the dwelling was never used as their main residence in the first place.

Stamp duty exemption for couples

One of the most important exemptions in property investment, is the exemption of stamp duty when a transfer of interest in property occurs between parties to a ‘marriage’ – (includes registered relationships and de-facto relationships).
Transfer or stamp duty is not imposed on an agreed transfer or a transfer by way of gift (regardless of whether one of spouses becomes a borrower on an existing mortgage) from one party to a marriage, to the other party of the marriage if -

• After the transfer, the couple will own the home as joint tenants or tenants in common in equal shares.
• The home is the principal residence of the couple.

Depreciation and Capital Works Allowance

Maximising property depreciation requires a clear understanding of how the different parts of a rental property qualify for Division 40 (Depreciation) or Division 43 (Capital Works Allowance). Division 40 is the legislation that covers the depreciation of ‘plant and equipment’. Each plant and equipment has an effective life set by the Australian Taxation Office and the depreciation deduction available on that item is calculated using this effective life.
Division 43 covers the deduction available to owners for the structural elements of a building and items within the property that are deemed irremovable. It includes the foundations, walls, ceiling, roof and also includes fixed assets like tiles, toilets, built-in cupboards, windows and doors. Properties qualify for this allowance depending on their age and type. The Division 43 allowance is ether 2.5% or 4% of a property’s historical cost (which can be estimated by a Quantity Surveyor).

Tenants in Common or Joint Tenants

Tenancy in Common is a form of co-ownership in which property is held with others, where the share of a deceased tenant forms part of the deceased’s estate. With Joint Tenants a principle of survivorship applies. On death of one Joint Tenant the surviving Joint Tenant or tenants acquire the whole property automatically by law (along with the debt belonging to the property). It follows that property held in joint tenancy does not form part of the estate of the tenant who dies.
It is a relatively simple process to switch property ownership from tenants in common to joint tenants or vice versa. From a taxation perspective there is no difference between tenants in common and joint tenants.

Our Comments

We are firm believers that the more knowledge one has on a topic the more potential opportunities can result, so hopefully the above is of some assistance to your respective situations. When structuring your property affairs we should be mindful of estate planning, asset protection and tax minimisation inclusive of land tax. In what order will depend of your respective personal preferences and needs & objectives.