Turning your home into a rental could trigger costly tax surprises
Many homeowners rent out their family home without realising it can trigger major capital gains and land tax implications, which differ if you move overseas or stay in Australia. Here’s what to check before you hand over the keys.
When your family home becomes a rental property, there can be important capital gains tax (CGT) and land tax implications to consider.
These will vary depending on whether you move into another home within Australia and remain a tax resident, or whether you relocate overseas and become a non-resident for tax purposes.
CGT implications
The family home is generally exempt from capital gains tax while it is your main residence.
That all changes once it is rented out and that exemption may no longer apply in full.
The six-year absence rule allows you to continue treating the property as your main residence for up to six years while it is rented, provided you do not nominate another property as your main residence during that time.
If you sell the property after this period, CGT will apply to the portion of the gain attributable to the non-exempt period. The gain is calculated from the date the property first became income-producing.
Staying in Australia vs moving overseas
If you remain an Australian tax resident and you have owned the property for more than 12 months you can access the 50 per cent CGT discount on any taxable gain after applying any main residence relief.
If you become a non-resident, the 50 per cent CGT discount is not available for the portion of the gain attributable to your non-resident period after 8 May 2012. The discount is apportioned by residency days.
If you sell while you are a foreign resident you generally cannot claim the main residence exemption at all unless you satisfy a limited life-events test. This rule applies to disposals after 30 June 2020.
If you re-establish Australian tax residency before selling you may again qualify for the main residence exemption including the six-year rule if its conditions are met.
Land tax when the home becomes an investment
Unimproved land tax is state based. Thresholds, rates, and surcharge settings differ radically by state and can change each year with the states below showing some of the variances.
New South Wales - From 1 January 2025 the general threshold is fixed at $1,075,000 and the premium threshold at $6,571,000.
Victoria - From the 2024 land tax year the tax-free threshold for general land tax is $50,000 with fixed dollar amounts and marginal rates above that level. Absentee owner surcharges apply on top of general rates.
Queensland - For individuals the general threshold is $600,000. Different thresholds and rates apply to companies and trusts.
Joint ownership - Do not assume the threshold is simply split by legal share.
For example, NSW issues a joint assessment for co-owners and applies one threshold to the joint portfolio then issues any required secondary assessments if one of the owners has additional land holdings within NSW in their own name.
Foreign surcharge land tax for mixed citizenship owners
As referenced in the NSW Land Tax Update (8 April 2024), the NSW Government reversed prior exemptions for citizens of several treaty countries, including New Zealand, Germany, Japan and India.
From 8 April 2024, these citizens are once again subject to foreign buyer surcharges and foreign owner land tax surcharges of up to 5 per cent from 1 January 2025.
This change has implications for couples where one owner is an Australian citizen and the other is a foreign citizen.
The surcharge applies to the foreign owner’s share of the property and can significantly increase annual holding costs once the family home becomes a rental.
Plan ahead before renting out
Before renting out your family home, consider:
- whether you will remain in Australia or move overseas
- if you qualify for the six-year main residence CGT rule
- how your residency status affects CGT discounts
- the current land tax thresholds and surcharge rules in your state
- ownership structure and potential surcharge exposure.
It is also important to note that land tax is not covered under federal tax laws and therefore is not part of your annual income tax return.
Many accountants and tax agents focus on federal tax obligations and may not automatically review or advise on state-based land tax unless they have specific experience in this area.
The onus of responsibility for understanding and declaring any applicable land tax rests with the owner of the land, not with the tax agent preparing your income tax return.
It is recommended to engage and notify the relevant State Revenue Office early when changing residences to understand any possible land tax implications.
