You purchased a lovely little get-away home but what are the tax implications of this property? This can vary depending on a number of factors, one of which is whether you sell the property or pass it onto your beneficiaries.
Although you may never actually use this home to produce rental income, the ATO will treat it as an investment property for tax purposes and the property will be subject to capital gains tax if purchased after 20 September 1985. What you can take advantage of, however, is the 50% CGT discount if you have held the property for more than 12 months. The cost base of the property (i.e. including stamp duty and legal fees) plus any costs in outgoings (council rates, etc) and costs of renovation are then reduced from the sale price and you pay tax (at your marginal rate) on the balance discounted by 50%.
If you do rent out the holiday home, then the costs of expenses in maintaining the home can be tax deductible. However, the deduction must be claimed on a pro rata basis. For example, if you rent out your home on airbnb during the summer holidays for a 3-month period only, then you can claim 25% of your expenses.
Often people ask us if they can leave their family home to one child and the holiday home to the other, not realising that they will be leaving the child with the holiday home may end up paying capital gains tax. It is preferable (if you wish to ensure equality) to leave your estate in equal proportions, e.g. 50% to Sam and 50% to Bill. Or alternatively use testamentary trusts to allow your children to take advantage of tax savings through trust distributions amongst several beneficiaries (including minors), who can take advantage of the tax free threshold ($18,200 in 2016/17).
You can also pass a property (purchased after 20 September 1985) to your beneficiary without any CGT liability if :
(1) just before your death, the property was your main residence;
(2) just before your death, the property was not used to produce income, AND
(3) Either:
- the property is sold within 2 years of your death OR
- someone entitled to use your property as their main residence (such as your spouse, a beneficiary entitled to a life interest or the beneficiary to which you leave your property) continues to use the property as their main residence until they sell it.