Why Australian Expats Should Think Twice Before Renovating Their Property Back Home – For many Australian expats living abroad, the idea of renovating their property back home can seem like a solid investment.
Whether the property is an asset they left behind, a recent purchase, or even an inheritance, it’s tempting to improve its value and aesthetics during their time abroad.
However, the intricate Australian tax landscape can turn this well-meaning endeavour into a financial quagmire.
Before deciding to undertake a renovation, here are a few reasons why an Australian expat might want to reconsider.
- Loss of the 50% CGT Discount
One of the significant tax benefits available to Australian residents is the 50% Capital Gains Tax (CGT) discount if they hold a property for more than 12 months. However, Australian expats lose this entitlement when they become non-tax residents. This means that if the value of the property increases substantially due to renovations or market factors, the expat can accrue a hefty tax liability. Essentially, they would be taxed on the full gain without the benefit of the 50% discount upon selling.
- Changes in Main Residence Exemption
Previously, Australian expats could claim the main residence exemption, allowing a property to be treated as their main residence for up to six years while rented out. However, new laws have removed this exemption for foreign residents. This means that if an expat renovates and the property appreciates in value, they might face a significant CGT bill on the entire profit, including the period it was their primary residence.
- No Tax Deductions on Major Upgrades
While routine repairs and maintenance can be claimed as tax deductions against rental income, major upgrades and renovations are considered capital expenses and are not immediately deductible. Instead, these costs might be added to the property’s cost base, potentially reducing the future capital gain. Still, they do not offer the immediate tax relief that many expect.
- Complexity of Remote Management
Managing a renovation from abroad poses challenges, including differences in time zones, communication barriers, and the lack of physical presence, potentially leading to misunderstandings, delays, or cost overruns.
Renovating a property back home might appear as a lucrative opportunity for Australian expats, but the associated tax implications and potential complications can erode its financial benefits.
Engaging with a tax consultant is essential to navigate this tricky terrain. While renovating has its pros, the cons, especially for overseas residents, can be daunting.