Which Property to Cover with Main Residence Exemption

Question

Re CGT
Refer below to a bit of history supplied to my tax agent.

With our renovations & costs going on and, on all year 2022, we sold my townhouse at Bellambi.
The Solicitor settlement on the 28/10/2022 break up is attached.
The history is I purchased the townhouse around 2005 for $320k. I just sold the townhouse for $783k.
You have the costs involved over those years re refurbishment & air con etc.
I lived in the townhouse for a couple of years before renting the townhouse.
Narelle & I did purchase a unit in Church St Nth Wollongong.
We sold it for a capital (CGT) loss refer attached solicitor break up. We have been told we can use this loss to reduce my CGT (maybe).
We lived back in the townhouse from Sept 2020 to May 2022.
We purchased 19 Alvan Pde Mt Pleasant house in May 2022
Our friends rented the townhouse from July 2021 to June 2022.
The place has been empty since July 2022.
I am still working on special projects, and I will earned $45,000 this financial year probably finishing soon!!!
Considering I always had friends staying and paying lower rent and overstaying etc.
Considering I am still working part time as a contractor at 69 years old because I have lots of engineering experience.
Considering I pay a lot of tax to keep (sole trader & one employer) working!!
We have $100k left after paying out all mortgages.
After selling my townhouse $80k is invested to reduce my CGT tax etc.
I have CSS super, and my wife (retired) has state super (teacher who left to have a family (single mum) then back to teaching so smaller super!!)

Can I reduce the amount of estimated CGT which is due next financial year etc?

Answer

A couple are only allowed one main residence exemption between them so from your marriage October 2007 you will have to choose which property to cover with your main residence exemption. You could cover half of each property but that is not the best line of attack. It is better to combine to make sure you fully cover the one with the maximum capital gain for as long as you can. It does not matter if one of you never lived in the property just as long as one spouse did it can be covered with both your half main residence exemptions. I have attached a Main Residence CGT spreadsheet with instructions that will help you calculate the capital gain on Bellambi and Mt Pleasant to decide where you main residence exemption is best utilised.

April 2006 to Oct 2007 you can cover Bellambi 100% and your spouse can cover her home 100% we will call this N’s home

From 2007 onwards you have to make a choice which home to cover with your main residence exemption.

Section 118-192 resets the cost base of a home that has been fully covered by your main residence exemption up to the time it was first rented out, to the market value at that time. If you want to trigger this reset then both you an N will need to cover Bellambi with both your half main residence exemptions. Now I suspect that when N sold her home in Nov 2015 she paid no tax claiming it was fully covered by both your main residence exemptions. So it appears you are stuck with no Reset on Bellambi and no main residence exemption there from Oct 2007 when you effectively gave your half entitlement over to N so she got to sell N’s home tax free.

So now going forward from Nov 2015 you do not have a place you can cover with your main residence exemption as the only property owned is Bellambi and it does not qualify as it is earning income and you have not lived there for 8 years. Unfortunately, tax law only gives you the option of being able to choose to cover another property with your main residence exemption when you own two or more properties that qualify. Accordingly, you will have no option but to cover Church st with your main residence exemption while you actually lived there so will probably miss out on the capital loss.

Moving back to Bellambi in August 2020 put both your half main residence exemptions back there. Why did you not move into Mt Pleasant until 3 months after it was purchased? If no one else was living there you can use section 118-150 to cover that 3 months with your main residence exemption while you made the place habitable but not if it was rented out for that period. If it started your ownership period as a rental then you cannot choose to cover it with your main residence exemption until your tenants move out. You might not want to anyway as you may prefer to cover Bellambi after you move out until it is sold using section 118-145 but this means that you are exposing Mt Pleasant to CGT. The spreadsheet will help you work out where your main residence exemption is best applied.

I assume you and your partner were a resident of Australia for tax purposes for all of this period.

The $320k cost base on Bellambi will be where you start as you missed out on the reset when first rented if I am correct in assuming N’s house was fully covered by your main residence exemption. You can increase this cost base by any expenses associated with the property that have not otherwise been claimed as a tax deduction section 110-25(4) 1997 ITAA. Also increase by stamp duty to buy, legals and selling costs. Add back any depreciation (more detail in the spreadsheet). The difference between the cost base and the sale price is the capital gain (or loss). This gain is then apportioned between days covered with your main residence exemption and days not.

If Mt Pleasant started life as a rental it cannot ever be covered completely by your main residence exemption. It is important that you keep records (as explained in the attached spreadsheet) for the whole time you own it, section 110-25(4) allows you to increase the cost base by all holding costs that you have not otherwise claimed as a tax deduction this includes rates, interest, insurance, cleaning materials.

I have included a spreadsheet that you can duplicate and use to collect the information you need for each property and do some what if analysis to decide which property can best benefit from your main residence exemption in the periods that you have a choice. As Bellambi is in your name, all of the capital gain on that will go in your tax return but N can choose to cover it at the applicable times with her main residence exemption but if you own Mt Pleasant at the same time that property will be exposed to CGT.

You should seek advice as to whether you qualify to make a contribution to super to reduce the capital gains tax you pay. You may have unused caps saved up that will allow a significant deduction but you must get the cash into super before 30^th June 2023 if you want it to reduce the capital gain on Bellambi. I am assuming Bellambi is taxable in the 2023 financial year. You see it will be taxable in the year you sign the contract for the sale, not the year of settlement but as Bellambi was settled in Oct 2022 I am assuming you signed the contract to sign after 1^st July 2022.