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rent and CGT

Your Investment Property: Rent and Capital Gains Tax (CGT) Q and A


Jan 7, 2020


Nitschke Nancarrow managing partner Kym Nitschke answered a property owner’s key question about rent and CGT for Your Investment Property.

Q: I bought a house in June 2010 and have been using it as my main residence since then. Over the last nine years, my mother has rented out a portion of the house on and off , and in total there have been five periods when she rented out 33.33% of the house.

She has now moved to New Zealand and we do not plan to rent out any portion of the house again. I have claimed tax deductions for the periods when she rented out 33.33% of the house, and we are planning to sell the house within the next two to three years. Will we be liable for CGT? Note that during the entire period since I bought the house, it has been my main residence, and I do not have any other property, investment or otherwise. Regards, Saf

A: It sounds like you have been very nice to your mother! Letting her stay in your house is an interesting situation – usually it’s the other way round and the child is constantly moving in and out of the home!

Unfortunately, the ATO legislation is quite clear about what needs to take place in this situation. Bear in mind that had your mum not moved in at all, the capital gain on the sale of your house would have been tax free. However, in this case, some of the capital gain will be liable for capital gains tax (CGT).

The calculation is based on the square-metre size of the house, the size of the room that she occupied, and the number of days that she lived there. Let’s assume that your mum’s five stays in your house are attributed to a loss of $2,000 per year, and she stayed for 365 days each time. This would amount to a total tax deduction of 5 x $2,000 = $10,000.

Now, you haven’t specified the amount of capital gain you will be making on the property, so let’s make up some numbers for illustrative purposes. The average increase in median house prices in Australia over the last 25 years was $460,000, according to the Aussie/CoreLogic 25 Years of Housing Trends report.

So let’s assume that you sell the property now (as opposed to in two to three years as you mentioned). Your hypothetical gain would be 9 years/25 years x $460,000 = $165,600. Your gain on the property would be 165,600 x 5 years/9 years x 33.33% = $30,664. Then we allow for the CGT 50% discount because the property has been held for longer than 12 months; this means you would need to list $15,332 as a capital gain on your tax return.

It’s important to note that there is a way around this situation, and that relates to treating the payments from your mum as board or lodging. The ATO treats board or lodging as a domestic arrangement, and consequently they are not considered to be rental income. However, in these circumstances you also can’t claim income tax deductions.

Nonetheless, in many situations where the capital gains are high, you may be better not claiming the tax deductions. In the situation listed above, it may have been better to treat the payments from mum as board rather than as rental income. Your short-term gain may result in some long-term pain.

Need to know

– By renting out parts of the home, some gains will be subject to capital gains tax.

– This does not apply if you treating the rent payments as board or lodging.

– Board or lodging is considered a domestic arrangement, so it does not attract tax deductions.

Get advice

Want advice about your property investment strategy, financial plan, accounting or any other wealth need?

Contact Nitschke Nancarrow, specialists in accounting, financial planning, loans and finance, investment and business. We operate in Adelaide, Sydney, Melbourne and throughout Australia. Managing partner Kym Nitschke is available for a free initial discussion about your situation. Call us on (08) 8379 9950 or send me an email.

– Kym Nitschke

The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.

Taxation, legal and other matters referred to on this website are of a general nature only and are based on Nitschke Nancarrow’s  interpretation of laws existing at the time and should not be relied upon in place of appropriate professional advice. Those laws may change from time to time.

Nitschke Nancarrow specialises in accounting, tax and financial advice for superannuation. Contact us now for a no obligations discussion about your needs.

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