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Capital Gains Tax Query – URGENT PLEASE
A couple are getting divorced and there is a property that is sold and we need to work out the CGT implications
Property sold – Property A which has a Granny Flat. Property is located in NSW
- This property was purchased on 21/4/05 by the wife in her name only. On 3/3/20 she transferred 50% of the property to her husband for nil consideration so they own this property 50/50
- It was their private residence from date of purchase ie on 21/4/05
- On 18/4/19 this property (the main house) was rented out until it was sold on 9/6/23
- The Granny Flat was available for rental at the end of 2012 & was rented out from 5/2/13. The Granny flat was rented out to 12/9/22 & after the split the wife moved in until it was sold. The wife owned no other property.
Property B
- The husband owns another property (Property B) which is his private residence he shared with his wife. The husband owns this private residential property with his parents (i.e. the huband owns 50% of the property & his parents own the other 50%). The wife has no ownership of this property. He bought this property in 2003. This has been the husband & wife’s private residence since they moved out of propery A on 18/4/19 as it became a rental property from that date.
My Query
I need to calculate the net capital gain of the sale of Property A for the husband & to the now to be ex wife.
My question – Is the cost base the date we use to calculate the net capital gain when the wife transferred 50% of the ownership of the property to her husband on 3/3/20? If so as it was transferred for nil consideration, I assume that the client has to get a market value of the property as at 3/3/20 from a real estate agent. This will be the cost base for the capital gains tax calculation. Are there other issues to consider?
I assume that the sale amount for calculating the net capital gains is simply the consideration they received on the property when they sold it on 9/6/23?
Thank you
Answer
Thanks for asking this complex question.
I attach two spreadsheets ( Protecting Your Home from CGT ). Duplicate them before you use them. The first I would generally give to the client to pull together the information you need. The second is what we use ourselves as a summary and it assumes knowledge. You will need to treat the house as two separate assets. While they are a member of a couple they are entitled to half a main residence each. They can choose to cover a property they have not even lived in with their half providing their spouse has lived in it in a way that allows them to cover it with their main residence exemption. But it seems pretty clear in this scenario that the wife should cover property A with her main residence exemption as much as she can and the husband property B at least after he buys it in 2020 because he never lives in it. As long as the Granny flat started life being used by family members or storage etc, basically part of the household rather than rented separately the property will be treated as one dwelling for CGT purposes even if later it is rented separately. Of course when this happens then it is treated as if they are renting out part of the home. Being one dwelling does allow them to cover the whole property with their main residence exemption when it is not being rented but that seems to be of very limited use here.
2020
The transfer to the husband in 2020 must be considered to have happened at market value so CGT should have been paid at this point as it was not fully covered with their main residence exemption because part of it was being rented out. But that is all history. The transfer basically reset the cost base on the husband’s half of the house to the market value at 2020. The wife’s half is still set at the cost base back at 2012 when section 118-192 would reset it to market value because both of them had covered it with their main residence up to that date. But if the husband covers property B then there is no reset and the CGT calculation goes back to when she purchased it in 2005.
Section 118-145 1997 ITAA
Allows a property to continue to be covered by the owner’s main residence exemption for up to 6 years while it is being rented out but the owner must be absent and not covering another property with their main residence exemption. The problem for the husband is that he or his wife never lived in the house after he purchased it so he is not entitled to use this section.
The catch with section 118-145 is it requires the owner to be absent. If the property is treated as one dwelling, then when the wife moves into the granny flat she is not absent from the property. Likewise in 2012 once the granny flat was advertised for rent it was considered that part of the home had been used to produce income without the owner being absent, so only a portion of the property could be covered by the main residence exemption. Now it looks like the granny flat was being rented out in 2019 when the whole property became a rental so not only is there no reset at that point because it already happened in 2012 or did not qualify at all because property A was not covered by the husband’s main residence. The reset can only happen the first time the property is used as a rental. At the time immediately before she became absent from the property it was only proportionally covered by her main residence exemption so she can only continue to cover that portion with her main residence exemption in her absence. Let’s say for the sake of examples here that the house is 70% of the property and the granny flat 30%.
Section 118-192 ITAA 1997
Is a compulsory section that resets the cost base to market value at the time a property first earns income if up until that point it was 100% covered by the owners main residence exemption. That is both husband’s half and wife’s half.
Section 110-25(4) ITAA 1997
This allows holding costs that have not otherwise been claimed as a tax deduction to be used to reduce the capital gain. For example interest, rates, insurance, repairs and maintenance such as lawn mowing and cleaning costs.
Section 118-170 ITAA 1997
A husband and wife are only entitled to 50% main residence exemption each but can use on different properties and if they only own 50% of the property they are covering then it can cover all of their share of the gain.
Cost base:
The husband can use his 50% main residence exemption to cover his half of the property he purchased with his parents in 2003 and they of course can use their main residence exemption to cover their half. Now I am going to assume he moved in there in 2003 then moved out in 2005 but as it was not being used to produce income section 118-145 will allow him to cover half the property with his half main residence exemption for an indefinite period of time. It would then seem logical that the wife utilise her main residence exemption to cover as much of the 2005 property as possible. The property will be treated like two separate assets.
Wife’s half:
If husband uses his main residence exemption to cover property A while they were together:
Start with half market value when granny flat advertised for rent in 2012. Increase cost base by half holding costs associated with the main house because they have not otherwise been claimed as a tax deduction. Then later increase by half holding costs of granny flat in 2022 and following as not claimed as a tax deduction. Half selling costs as well and possibly need to reduce by building depreciation claimable. This will give you the full capital gain for the period then you have to work out what portion is taxable. This is done by examining number of days covered with main residence exemption, as this all is in regard to just her half of the property even when she is a member of a couple she can cover it because it is only half of the home she is covering.
So for example 2012 to2019 when she moved out 70% of her half of the property was covered with her main residence exemption. Very roughly 7 years x 365 days = 2555×30% = 766 days exposed to CGT Then from 2019 to 2022 she was absent but only covering 70% just before she vacated so 3x365x30%=329 days exposed to CGT. Then 2022 to 2023 not absent but living in granny flat with main house rented out so only 30% covered with her main residence exemption. That is 365×70%= 256 days not covered. A total of 766+329+265 = 1,360 days not covered over 11 years x 365 = 4,015 days 1360/4015 = 34% of the gain is subject to CGT but of course there is also the 50% CGT discount. And you need to tidy this up for the actual dates rather than full years.
If husband uses his main residence exemption to cover property B while they were together:
If instead the husband gives his half main residence exemption to property B right from 2005, then property A is not fully covered by a main residence exemption up to 2012 so there is no market value reset when first used to produce income. The wife’s cost base starts way back in 2005. Lots of increases to the cost base for half holding costs that were not otherwise claimed as a tax deduction. Fortunately, as we are now just looking at the CGT consequences for half the house then in theory we can utilise her half main residence exemption. But look at 2020 has she already utilised her half main residence exemption in that transfer so none of the period between 2005 and 2020 has any main residence exemption entitlement. Glad you are acting for both spouses so you can work this out with them.
Once we get to 2020 it is straight forward she gives property A her 50% and he gives property B his 50% because they both own half of each property so getting the maximum possible coverage. Then from 2022 when they separate they are entitled to a full main residence exemption each, anyway. But from 2005 to 2020 where the husband puts his main residence exemption determines whether the cost base starts in 2012 or 2005 and will affect the number of days calculation.
Husband’s half:
The first element is simply half the market value in 2020 when he acquired the property plus any stamp duty and legal costs. There will be some holding costs that have not otherwise been claimed as a tax deduction regarding the granny flat in 2022 and 2023. The only other likely increases to the cost base are the selling costs. Note that if the building was built or improved after 16th September 1987 there may be building depreciation that has to reduce the cost base.
Please check that I have the facts right as some of them are implied in what you have written. Yes sale amount is price received (half each) provided it was an arms length transaction. You know back in 2020 there should have been some CGT paid by the wife on the transfer as it was not covered fully with her main residence exemption because the granny flat had been available for rent since 2012. You need to see how she calculated the CGT on that as it probably locks in where the husband’s half main residence was utilised during that period.
