How Does the Property’s Main Residence Exemption Aged Care Work?
There’s a common misconception that you’re required to sell your home if you move into an aged care facility.
It could certainly help cover the ongoing aged care fees of living in a facility, but it’s not a requirement.
There are a few scenarios that could play out with your property when you relocate to aged care. For example, it could be retained for inheritance purposes but not rented out. Or it could be rented out to attract an additional source of income to cover the aged care costs.
But what does this all mean for capital gains tax (CGT)?
Well, here’s everything you need to know about the main residence CGT exemption and how the absence rule could benefit you if you chose to rent out the property after relocating into an aged care facility.
What Is Capital Gains Tax?
Before considering how the full main residence exemption works when selling your family home and moving into aged care, it’s important 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’re a property investor and you sell an investment property, you’ll have to pay CGT if you made a profit from that sale.
This is because that profit is considered a capital gain and must be declared on your income tax return.
Fortunately, however, CGT is typically only applicable to property investors because they generate assessable income from their investment properties.
So, if you’re an owner-occupier, your property will generally be considered to be your ‘main residence’ for tax purposes.
As you don’t necessarily produce assessable income from living in your own home, the Australian Taxation Office (ATO) allows you to be exempt from paying CGT should you decide to sell that property.
However, you must meet certain criteria before the property is 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 meet the following criteria, you must:
- live in the property,
- keep your possessions at that property;
- you use the address to receive your postal mail and register on the electoral roll, and
- have all the utilities connected in your name?
Does The Main Residence Exemption Apply After You’ve Moved Into Aged Care?
It’s not uncommon for property owners to want to retain ownership of their homes even after they’ve moved into an aged care facility. This could be for a variety of reasons, including:
- inheritance purposes,
- to provide a home for their spouse, and
- for Centrelink purposes (due to concessional treatment of the home for social security and aged care purposes, retaining the property could result in higher Centrelink payments and lower aged care fees – but you’ll need to seek professional advice from a financial advisor on this topic).
So, what does this mean for your main residence status for tax purposes?
Well, for most residents, an aged care facility isn’t necessarily considered your “new” main residence once you move into it.
This means that, provided that you don’t treat any other property as your main residence and you don’t rent it out to produce income, you can retain the property as your main residence indefinitely.
So, if you decide to sell it eventually, you’ll be exempt from paying capital gains tax should the sale result in a capital gain.
If you don’t sell the property in your lifetime, and the property is inherited by one of your family members or a surviving spouse, specific CGT rules apply. If you’re interested in finding out more, make sure to check out everything you need to know about CGT on inherited property.
What Happens If You Decide To Rent The Property Out To Produce Income?
The ongoing aged care facility costs, such as the daily accommodation payment, could mean that you want to retain ownership of your property but use it as a means to produce rental income.
However, once you decide to use your property for investment purposes (in other words, to produce income), you could end up triggering CGT liability on its eventual sale.
Thankfully, the ATO has proposed to apply an absence rule in circumstances where you rent your home out but retain it as your main residence for capital gains tax purposes.
The absence rule (otherwise commonly referred to as the CGT six-year rule) allows you to rent out your main residence for six years and treat the property as your main residence while away.
So, provided that you sell your property within six years, you can claim the main residence CGT exemption.
Another beneficial element of claiming the CGT main residence exemption using the six-year absence rule is that it resets each time the property is re-established as the main residence when you move back in.
In other words, each time you move back home, the six-year rule resets. So you can claim the main residence exemption, provided that you don’t move away for more than six years at a time.
But because you typically won’t move back into your main residence after relocating to an aged care facility, this may not apply.
Alternatively, you could qualify for a partial exemption. You can find out more in our guide on CGT on property investments.
The sooner you start planning for potentially moving into an aged care facility, the better – especially when it comes to establishing what you’re going to do with your main residence.
Thankfully, the ATO will allow you to retain main residence status for tax purposes indefinitely – even after you’ve moved out of the property and into an aged care facility. This will allow you to claim the CGT main residence exemption if you decide to eventually sell the property during your lifetime.
And if you don’t sell the property, keeping the property as your main residence may make things easier for the person inheriting the property.
However, aged care facilities can come at a hefty price, so you may want to rent your property out to generate some income. If that is the case, you may still be allowed to claim the main residence CGT exemption using the absence rule – but then you’ll have to sell the property within six years if you do not want CGT to be triggered, but this could impact other aspects.
So, there’s a lot of factors to consider. However, having a plan in place will undoubtedly make the process a whole lot smoother.
Understanding your tax position is key to making informed decisions about your property portfolio. But, property tax can be a complex area to navigate on your own. Here at Property Tax Specialists, we prioritise ongoing tax planning and use projections to determine your tax position at any given time.
So, if you would like some assistance with navigating your tax plan when moving into an aged care facility, get in touch today.
Please note that every effort has been made to ensure that the information provided in this guide is accurate at time of writing. You should note, however, that the information is intended as a general guide only, providing an overview of general information available to property buyers and investors. This is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.