The family home is not always a tax-free zone

THE tax-free status of family homes is being challenged amid lifestyle changes and the boom in renting rooms to strangers.

People who share their homes on accommodation websites or house international students make their home partly taxable as soon as they earn an income from it. There are other instances where part of a home’s sale proceeds may get taxed.

University lecturer, property investor and author Peter Koulizos said international students had become a great income earner for many homeowners.

“And there’s a lot of people doing Airbnb. If you are doing this the income is taxable and you will have some capital gains tax issues at the time you sell,” he said.

For most people the tax bill isn’t too painful, because only the proportion of the home and the portion of time used to earn income is taxable.

“If the room is 10 per cent of the home, then 90 per cent of your capital gain on the sale of the property is still tax-free,” Mr Koulizos said.

HLB Mann Judd tax partner Peter Bembrick said many people did not take tax into account when deciding to derive income from their home.

“Just because you don’t claim expenses doesn’t mean you are not exposed,” he said.

Mr Bembrick said other tricky situations included:

breakdowns where one main residence became two, but tax rules did not allow exemptions on both properties;

a new home but treating the old one as an investment property;

overseas or interstate for work, although tax rules allowed people to treat their home as CGT-exempt for six years, while renting it out.

“It is possible to buy a second

property to live in and use the six-year absence rule for their original house. The trade-off is the second property will be exposed to CGT on sale,” he said.

This strategy could benefit retirees who downsized to an apartment but retained their original home – and its tax-free capital gains – for their children.

“Mum and dad may be prepared to pay CGT when they sell the apartment,” Mr Bembrick said. The key is you can only have one tax-free family home at a time.

Mr Koulizos said the common practice of keeping an old family home as an investment property when upgrading was “generally not a good idea”.

This is because it’s best to have tax-deductible debt rather than private debt, and an existing home with a small mortgage has fewer deductions to offset income received from renting it out.