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Introduction to the Calculation of Main Residence and Capital Gain Tax

June 19, 2015

In recent years, as the real estate market booming a lot, properties sales and capital gain tax is become an even more hot topic of discussion. About the correlation between main residence and the capital gains tax, here are some examples,

When a property is considered to be the main residence, usually we need to consider the following aspects: whether you and your family are going to live in this property; whether your household items are inside this property; Whether the relevant letters and the cost of the bills are sent to the address of this property; Whether life related services such as water power grid gas opening in this property and so on.

We usually say main residence can get deduction of capital gain tax. Below we have a few most common examples,

  1. As main residence.

Xiaoxu moved into the property right away after he bought it, then xiaoxu doesn’t need to pay capital gain tax at any time of selling this property.

  1. Xiaoxu lives in this property for a period of time, and then leaves it vacant or no rental income for some time.

Xiaoxu moved into the property right away after he bought it.  Three years later, due to the job change, he rent an apartment near his company. While xiaoxu’s father still lives in this property and does not pay any rental. If xiaoxu still considers it as his main residence, then xiaoxu doesn’t need to pay capital gain tax at any time of selling this property after he moves out. (When the property does not produce any rental income, you can move out indefinitely with considering this property as main residence, thus can exempt from capital gain tax).

  1. 6 years relief policy—main residence produces rental income

Xiaoxu moved into the property right away after he bought it.  Three years later, due to the job change, he rent an apartment near his company and leased his property. If xiaoxu still considers it as his main residence, then xiaoxu doesn’t need to pay capital gain tax within 6 years when selling this property after he moves out. If xiaoxu moves back to live in his property for one year at the eighth year and then moves out again, then a new 6 years exemption period will begin again. In addition, if the owner has multiple properties at the same time, the owner can only choose one as his main residence. Only the one regarded as the main residence can enjoy exemption period of six years.

  1. Owning two main residences at the same time

At any time you can only have one main residence unless you sell your old and at the same time buying a new one. In this case, you can enjoy the overlapping period of up to six months only. Also you need to satisfy the following conditions: your new bought property is regarded as main residence after sold your old one; you lived in your old property continuously for 3 months in the 12 months before you selling it, and did not produce any rental within these 12 months.

  1. Lease the main residence and then leave it vacant

If xiaoxu bought a property, he lived in it for three years and then moved to another place. He leased his property for six years, and then leaves it vacant for four years, then he sold it at the 13th year, thus he does not need to pay capital gain tax. As long as the leasing period is less than 6 years, and the vacancy time is unlimited, then he does not need to pay capital gain tax.

  1. The leasing period of main residence is over six years

Xiaoxu bought a property for $500,000 in July 1st, 2000, and then he moved into it straight away. On July 1st, 2001, xiaoxu needs to move to overseas because of work. His property was leased. On July 1st, 2010, xiaoxu sold his property for about $700,000 when he was back to Australia. The relevant intermediary fee and attorney fee is $20,000. In this case, how to calculate the capital gain tax of this property?

First of all, we need to compute the capital gain:

$700000 – ($500000 + $20000) = $180000

Then we need to figure out,

Non self-occupation time,

Since xiaoxu has only one property and regards it as main residence, so in this case, the 6 years exemption was still works. So after xiaoxu moved out at July 1st, 2001, this property was still regarded as main residence within 6 years. Xiaoxu’s non self-occupation time is from July 1st 2007 to July 1st 2010, the total is 1097 days.

Owning the property time,

It started from July 1st 2000 and ended at July 1st 2010, so the total is 3653 days.

So xiaoxu finally to declare in 2011, the annual tax return for the net capital gain is,

$180,000 x (1097/ 3653) x 50% = $27,027

This article is for reference only.