The tax implications when renting out your primary residence are generally good for Australians moving overseas. Find out how renting out your primary residence when moving abroad impacts you.
1. Capital Gains Tax
Most people are aware that their family home (or primary residence) is exempt from capital gains tax in Australia. What this means is that any money you make from the sale of your family home through capital appreciation is not subject to capital gains tax in Australia.
However, most people believe that when they move out of the property, then any further capital appreciation of their house will be subject to capital gains tax.
This is not necessarily the case.
As long as you do not claim an alternative house as your primary residence, then you are entitled to continue to claim your previous home as your primary residence for capital gains tax purposes for up to an additional six years (6 year temporary residence rule).
So if your plan is to move overseas for only 4 to 5 years then, as long as you do not claim an alternative house as your primary residence, then your capital appreciation during your time abroad should remain CGT free.
Update: In the May 2017 Australian Federal Budget, the Australian government announced that non-residents of Australia would no longer be entitled to receive the CGT exemption on a primary residence in Australia. Existing properties will however be grandfathered to 30 June 2019. To understand how this will work in practice and what the exact implications are for Australian expats we will need to await the draft legislation, and see whether it passes through the Senate. Draft legislation relating to changes to the CGT exemption for main residences has been issued by the Australian government. Click here for the latest information.
2. Renting Out Your Primary Residence
Renting out your primary residence (furnished or unfurnished) while living overseas has the potential to generate you significant income. It will also allow you to claim numerous costs as rental property tax deductions.
When you rent out your home, then any rent you receive will be taxable in Australia. Depending on the tax arrangements with your new country of residence, it may be taxable there as well.
3. Tax Deductions
If you decide to rent out your primary residence, you will then be entitled to claim all your expenses related to the upkeep and management of the home.
Potential rental property deductions include cash deductions and non cash deductions (depreciation). We discuss depreciation more in this article and how you can ensure you maximise the benefits. Generally, the following are all allowable tax deductions if you rent out your primary residence.
- interest on the loan used to purchase the primary residence
- property management expenses
- maintenance costs
- depreciation of the building, fixtures and fittings
- depreciation of any capital improvements you make to the house whilst renting
- water rates, council rates etc
- utility costs (electricity, gas) to the extent they are borne by the owner
- land tax
4. Land Tax
Land tax is a tax levied on the owners of land by the relevant State or Territory government, irrespective of whether you are earning income from the land. There are a number of exemptions to land tax with the primary one being if it is your primary residence. This exemption disappears once you decide to rent out your property.
Land tax can be a significant cost depending on the value of your property, how many other properties you own, and the tax scales in the State or Territory the property is located.
5. Negative Gearing
If you become a non-resident for Australian tax purposes, then you can still “negatively gear” your primary residence. Should your tax deductions exceed your rental income, and you make a loss on your taxable income in Australia, then you can carry forward that loss to future tax years. See our article on How does negative gearing work for Australian expats for more information.
Disclaimer : This information is for educational purposes only and does not constitute financial or taxation advice. As this information is not advice and has been prepared without taking into account your objectives, financial situation or needs you should, before acting on this information, consider its appropriateness for your circumstances. Independent advice should be obtained from an Australian financial services licensee before making investment decisions, and a registered (tax) financial advisor/accountant in relation to taxation decisions. To the extent permitted by law, we exclude all liability for any loss or damage arising in any way. We may receive referral commissions from companies referred in this article.