Main Residence Exemption & Property Flipping

Flipping Houses tax advice

Main Residence Exemption & Property Flipping

One of the most generous tax concessions in Australia is the main residence capital gains tax exemption. In general terms, it can (in some cases) exempt any capital gain you make on your main residence (and surrounding land up to 5 acres) assuming that it was the home of your family for the entire ownership period. However, it is not always the case that this exemption applies, as it is important to note that if the ATO considers your activities to be “property flipping” then this may mean that you lose access to this generous concession.

What is property flipping? This is where you purchase a property with the intention of doing substantial renovations to it in order to realise a profit. The primary intention is not to live at the property for an extended period of time, but rather to improve the value through renovations and sell for a healthy profit. Factors which may indicate that an activity is a property flip can include:

  • The activities of buying and selling renovated properties is happening frequently by the taxpayer.
  • The taxpayer has lived at the property for a relatively short period of time.
  • The extent of the renovations on the property are quite considerable (e.g. the house has been gutted and fully renovated, walls may be moved around etc.)

Of course, there may be valid reasons for why a taxpayer may be looking to offload a renovated property which may point to it not being a profit-making exercise but rather a decision to sell based on life’s circumstances. For example, they may be selling due to a desire to reduce the monthly loan repayments, the family may be increasing/decreasing in size or they may need to move to be closer to work/study.

All the factors in the situation need to be considered in its entirety so that the right tax treatment can occur. This is especially important with property flipping because, if it is deemed to be a property flip, GST may also apply. It may be possible to use the margin scheme (if GST applies) to reduce the GST exposure on the sale of the renovated property.

Please call our experienced property tax team on (08) 9525 4000 if you need any assistance in this particular area.