The circumstances under which you acquire any property will determine what your property-related tax obligations are and how you can transact with it. This article discusses two common problems homeowners face and how they can be legally resolved. Read on to learn more.
1. Should I pay Capital Gains Tax (CGT) on selling my property for profit?
Generally, if you sell a house for more than you bought it you earn capital gain, and this is taxable income. It is added to your assessable income for the period and taxed accordingly. However, there are some sale transactions which are exempt from CGT, such as selling your main residence.
If you're selling your main home, you may need to check whether it fits the criteria to avoid missing your tax obligations. According to the ATO, a qualifying home should:
have a house which you should have lived in while being a tax resident of Australia (vacant properties and time before official tax residency don't qualify)
you and your family should have lived in it, your belongings should be there, your mail should be delivered there and it should be your official home address and the place to which utility bills apply
not have been used to earn taxable income e.g. running a business out of it, renting it out or flipping it before sale
sits on no more than two hectares of land
These requirements entitle you to full exemption. If you don't meet any of these conditions, you may be eligible for partial exemption – a real estate attorney will guide you depending on your exact circumstance.
Properties other than your main residence are eligible for CGT upon profitable sale. They include second/holiday homes, rental properties etc. If you convert your main residence to multiple units for rental income, you should also pay CGT on sale. However, you can also claim capital loss against your CGT obligation whenever you incur losses.
2. How is property co-ownership handled in transactions?
Property co-ownership allows two or more people/parties to share property ownership according to the amount of money invested or any other criteria they decide on. How co-owned property is handled depends on the terms of co-ownership. There are two main types:
Tenancy in common – this is where the property is divided between the parties, and owners can transfer their interest independent of the other (unless the agreement stipulates otherwise). This is the more flexible option, and an agreement is drafted to define rights, obligations and interests, making succession and transactions easier.
Joint tenancy – this is common among couples, in which both parties own the whole property together, but individually own nothing. If one party dies, the whole property automatically becomes the other party's.
If you have a tenancy in common and you wish to relinquish your interest, you'll have to find a buyer for your share only, and this is usually harder. Your agreement can stipulate that your co-owners buy out your interest, but this isn't always provided.
Another risk is that if the property is used as security for a loan or mortgage, you're all liable for the loan in case it defaults, even if the loan belonged to one of you. Common disputes include whether or not to sell or refinance a mortgage, property maintenance, division of income from the property and mortgage repayments. Having a comprehensive co-ownership agreement can help to resolve some of these disputes.
For more information, get in touch with a lawyer who offers converyancing services.