How Does the Property’s Main Residence Exemption for Aged Care Work?

There’s a common misconception that you must sell your home if you move into an aged care facility.

While selling your home can certainly help cover the ongoing costs of living in an aged care facility, it’s not a mandatory requirement.

Several scenarios can unfold regarding your property when you relocate to aged care. For example, you might retain ownership for inheritance purposes but choose not to rent it out. Alternatively, you could rent out the property to generate additional income to help cover aged care expenses.

But how does this all impact your Capital Gains Tax (CGT) liability?

This guide will explain everything you need to know about the main residence CGT exemption and how the absence rule can benefit you if you choose to rent out the property after moving into an aged care facility.

What Is Capital Gains Tax?

Before exploring how the full main residence exemption applies when selling your family home and moving into aged care, it’s crucial to understand Capital Gains Tax (CGT).

CGT is a tax levied by the government on the sale of assets used to generate income. In other words, if you are a property investor and sell an investment property, you will be liable for CGT on any profit realized from that sale.

This profit is considered a capital gain and must be declared on your income tax return.

However, CGT typically applies only to property investors who generate assessable income from their investment properties.

If you are an owner-occupier, your property is generally considered your “main residence” for tax purposes.

Since you don’t typically generate assessable income from living in your own home, the Australian Taxation Office (ATO) allows you to be exempt from paying CGT if you decide to sell that property.

However, you must meet specific criteria for your property to be considered your main residence for CGT purposes.

Test To Determine Main Residence Exemption

To be eligible to claim the main residence exemption for CGT purposes, you must:

• Live in the property.
• Keep your personal belongings at the property.
• Use the property’s address for receiving mail and register to vote on the electoral roll.
• Have all utilities connected to your name.

Does the Main Residence Exemption Apply After You’ve Moved Into Aged Care?

Many property owners choose to retain ownership of their homes even after moving into an aged care facility. This decision can be driven by various factors, including:

• Inheritance purposes.
• Providing a home for their spouse.
• Meeting Centrelink eligibility requirements. (Retaining the property can sometimes result in higher Centrelink payments and lower aged care fees, but you should seek professional financial advice on this matter.)

So, how does this affect your main residence status for tax purposes?

For most residents, an aged care facility is not considered your “new” main residence once you move in.

This means that, provided you do not designate any other property as your main residence and do not rent out your home to generate income, you can retain the property as your main residence indefinitely.

Consequently, if you decide to sell the property at a later time, you will be exempt from paying capital gains tax on any resulting profit.

If you do not sell the property during your lifetime, and the property is inherited by a family member or surviving spouse, specific CGT rules apply. For further information, please refer to our guide on CGT on inherited property.

What Happens If You Decide to Rent Out the Property to Produce Income?

The ongoing costs of living in an aged care facility, such as the daily accommodation payment, may motivate you to retain ownership of your property and use it to generate rental income.

However, once you begin using your property for investment purposes (that is, to generate income), you may trigger CGT liability upon its eventual sale.

Fortunately, the ATO has introduced an absence rule to address situations where you rent out your home but wish to retain it as your main residence for capital gains tax purposes.

The absence rule (also known as the CGT six-year rule) allows you to rent out your main residence for up to six years while still treating it as your main residence for capital gains tax purposes.

Therefore, if you sell your property within this six-year period, you can still claim the main residence CGT exemption.

Another advantage of claiming the main residence CGT exemption using the six-year absence rule is that the exemption period resets each time you return to live in the property.

In other words, each time you move back into your home, the six-year rule is reactivated. This allows you to claim the main residence exemption again, provided you do not remain away from the property for more than six years at a time.

However, since you typically will not return to live in your main residence after moving into an aged care facility, this aspect of the rule may not be applicable to your situation.

Alternatively, you may qualify for a partial exemption. For further information, please refer to our guide on CGT on property investments.

Key Takeaways

Early planning for a potential move into an aged care facility is highly recommended, particularly regarding the future of your main residence.

Fortunately, the ATO allows you to maintain your main residence status for tax purposes indefinitely, even after relocating to an aged care facility. This enables you to claim the main residence CGT exemption if you decide to sell the property during your lifetime.

If you choose not to sell the property, maintaining it as your main residence can simplify matters for the individual who inherits it.

However, the significant costs associated with aged care may necessitate renting out your property to generate income. If you choose this option, you may still be eligible to claim the main residence CGT exemption using the absence rule, but you will need to sell the property within six years to avoid triggering CGT liability. However, this may have other implications.

There are numerous factors to consider. However, having a well-defined plan will undoubtedly streamline the process.

Understanding your tax position is crucial for making informed decisions about your property portfolio. Navigating property tax matters can be complex. Here at Property Tax Specialists, we prioritize ongoing tax planning and utilize projections to determine your tax position at any given time.

If you require assistance with navigating your tax plan when considering a move into an aged care facility, please do not hesitate to contact us today.

Disclaimer:

Please note that every effort has been made to ensure the accuracy of the information provided in this guide at the time of writing. However, it is important to acknowledge that this guide is intended for general informational purposes only and provides an overview of general information accessible to property buyers and investors.