together with my family I was transferred overseas by my employer in August 1998. We rented out our home before selling it in September 2001. We subsequently paid a deposit on another home in the next suburb in December that year and settled in February 2002. This house was rented until October 2004 when we began major renovations. These were finished by the time we returned permanently to Australia in December 2005 and we have lived there since then.
I know that the first home qualifies for exemption under the 6 year CGT rule but is it possible to claim it for the home we replaced it with? If not can you suggest ways that we could minimise the tax applicable? We aren’t planning to sell at the moment but may do in 3 to 4 years time.
I am assuming the house is owned in your personal names.
Section 118-150 and Section 110-25(4) ITAA 1997 can help reduce your CGT a lot but regardless there will be some CGT payable if you make a gain of the sale of this property.
The capital gain is calculated for the whole period of ownership and then apportioned according to the number of days covered by your main residence exemption and the number of days not. You are only subject to tax on the percentage that represents the number of days it was not covered by your main residence exemption and then you can apply the 50% CGT discount to it. You cannot cover this new property with your main residence exemption while the tenants were living there. The 6 year rule does not apply to your circumstances because you did not first live in the house and then rent it out.
Section 118-150 allows you to cover a property with your main residence exemption while you are renovating it. But there can’t be anyone living there at the time that this section applies. So you can start covering the property with your main residence exemption from the time your tenants moved out. That is providing you moved into the property as soon as the renos were complete.
Section 110-25(4) allows you to increase the cost base of the property (thus decreasing any capital gain) by any costs associated with holding the property that have not already been claimed as a tax deduction. This includes but is not limited to interest, insurance, rates and repairs. It also includes maintenance which can cover cleaning materials, light globes, lawn mower fuel etc. Just keep alert and keep good records. The way the formula works the costs associated with the period you live there can proportionally increase the cost base for the period you didn’t.
A last resort is to still have the property as your home when you die. You see regardless of any CGT liability accrued in your life time your heirs inherit your home with a cost base of the market value at the date you died.