Homeowners must understand before renting their home
Question 1: Hello, I’m wondering what happens if you moved out of your primary place of residence, rented it for several years and paid taxes on that rent, and then go back there.
After a while, is your primary place of residence “reconfigured” as if you had never left it, so that you do not have to pay any capital gains on the product when is it finally sold? Thank you
It is not uncommon to leave your home, rent it out, and come back to it later.
You can choose to continue to consider a home as your primary residence for the purposes of the CGT exemption even if you have ceased to use it as your primary residence. This allows the CGT exemption to continue to apply.
Please note that this exemption does not apply to a period before a house becomes a person’s primary residence (for example, the house is rented out before the person first lives there). A person must first live in the house and then move out.
Six-year exemption if the house is used to generate income
If the accommodation is used for profit (i.e. rented), the CGT exemption may continue to apply for up to six years.
If a person is absent from their primary residence at different times during their period of ownership, the six-year period begins again each time.
This means that you can live in the house and move repeatedly without affecting the primary residence status of the house.
A person who leaves their primary residence and purchases another home can opt for the CGT principal residence exemption to apply to one or the other of the goods but not to both – that is, you can only have one main residence at a time for the purposes of the CGT exemption.
This decision does not need to be made until one of the residences is sold.
By the way, if a person leaves their primary residence and does not use the house for profit, they can continue to choose that property as their primary residence for an unlimited period of time.
Before renting out your main residence, it would be advisable to speak to your tax accountant in order to understand how the above affects your personal situation.
Question 2: Capital gains on SMSF: What tax am I liable for?
If your pension fund is in the accumulation phase and if the assets (shares, property, managed funds, etc.)
Normally, all super fund income is taxed at a maximum of 15 percent, so after applying the discount (5 percentage points), the maximum CGT rate is 10 percent.
This applies to all super funds, including SMSF.
If your super fund is in the retirement phase, no capital gains tax applies.
If you held the same asset apart from super and held it for more than 12 months, you would get a 50% discount.
But that’s a 50 percent discount on your marginal tax rate, which in most cases will be much higher than the super fund win rate of 15 percent.
Question 3: In your answer to Q1 of September 5, 2021, relating to the taxation of capital gains, you specify: “Any capital gain that you realize on the sale of your investment property, shares or managed funds, if” adds to your taxable income for that fiscal year ”.
Does this also apply to the proceeds of a surrendered life insurance policy? Thank you. Alain
Nowadays, most life insurance policies are unbundled of any savings element, and the proceeds paid out are generally tax-free (if the policy is held outside the super).
For example, a life insurance benefit paid directly to your spouse or child is generally not taxable when the policy is held outside of the superannuation.
However, the tax-exempt status of your death benefit may be affected when your life insurance is purchased through a pension fund and paid to a financially independent beneficiary.
But because you used the term “ceded”, you may be referring to the old-fashioned whole life or endowment policies.
These policies combined a life insurance component and a savings component. AMP, along with other life insurance companies and mutuals, sold many of these policies many years ago.
It may be necessary to include some of the proceeds as taxable income, but not as capital gains on your tax return.
Again, if purchased through a superannuation, these plans fall under normal super-tax law and are taxed differently from non-super policies.
According to the AMP Product Information Booklet on Whole Life Insurance Policies and Endowment Policies, if any of these types of non-super plans are redeemed, forfeited, terminated, or expire before the end of the term period of four or ten years, income tax is due on investment gain part of the benefits.
The investment gain portion is the difference between the amount of premiums or contributions paid into a policy and the value of the plan’s benefits when they are paid.
The policy owner must report this amount as taxable income on their tax return.
That said, since these issues can be complex, you should speak to the product supplier in regards to your specific product and then seek personalized tax advice.
Craig Sankey is a Chartered Financial Advisor and Head of Technical Services and Advisory Activation at Industry Fund Services
Warning: The answers provided are general in nature and while motivated by the questions asked, they have been prepared without considering all of your goals, financial situation or needs.
Before relying on any information, be sure to consider the relevance of the information to your goals, financial situation, or needs. As far as the law allows, no liability for errors or omissions is accepted by IFS and its representatives.
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