Ask Ban Tacs Question
We have been fortunate enough to enter the property market in multiple cities and have seen great growth over the years. We have sold one property and we will be selling another one of our properties soon. We are looking at the capital gains and in particular, how we can limit the amount of capital gains tax we will be liable to pay utilizing the main residence rule.
Background information
Property 1 – Perth
Bought 100% Nadia – 2003
Resided until Aug 2004
Rented from Aug 2004 – Jan 2017
Sold 30 Oct 2016
(Utilized as main residence for (Nadia) tax purposes until 2010)
Property 2 – Sydney
Bought 50% each Peter and Nadia – 2013
Resided until Dec 2015
Rented from Dec 2015 – Feb 2025
Intended to Sell from Feb 2025
Property 3 – Brisbane
Bought 50% each Peter and Nadia – Apr 2018
Resided until Jan 2022
Rented from Jan 2022 – current
We are wondering if we can both claim the Sydney property as our main residence. As Nadia claimed main residence for the Perth property (2004-2010) is there anything that would exclude her from claiming main residence for the Sydney property? And then, if we do claim the 6-year main residence for the Sydney property does that mean that we would only pay tax on the capital gains from 2021 onwards?
Or, would it be possible to claim the Sydney property as our main residence from 2013 until 2018 only? (The date we moved into the Brisbane property). Therefore our Brisbane property becomes our main residence from 2018-onwards.
We are in the process of having the Sydney property retrospective valued. Currently the valuation will be for Dec 2015. However, could we or should we actually get a retrospective valuation for Apr 2018, when we moved into our Brisbane home (making this our main residence), or Dec 2021 (6 years from rental) for the capital gains calculations?
If we do claim main residence on the Sydney property (2013-2021), how will that affect the potential to claim the Brisbane property as a main residence should we sell that in the future? Noting that we actually moved out and rented our Brisbane property in Jan 2022.
We appreciate your time very much, thank you. If you have any further queries, please feel free to contact us via email.
Answer
Once you become a member of a couple you are only entitled to one main residence exemption between you. You can split it half to half of one property and half to another property but usually the best way is to combine and cover the property with the highest capital gain completely. You became a couple in Jan 2010. The Perth property has already been sold 100% covered by the main residence exemption up to Aug 2010. At that point nothing qualifies to be covered by your main residence exemption because the 6 year rule has run out on the Perth property and there are no other properties purchased till April 2013.
Section 118-150 ITAA 1997 allows you to cover vacant land with your main residence exemption for up to 4 years before you move into a house built on it, providing you move in asap after the certificate of occupancy is issued (I am going to assume this happened) and during the 4 years you did not cover another property with your main residence exemption.
Section 118-192 ITAA 1997 resets the cost base of a property that up until the date it was first used to produce income, has been fully covered by your main residence exemption, to market value when it was first used to produce income.
Section 118-145 ITAA 1997 allows you to cover a property that used to be your home with your main residence exemption for up to 6 years after you move out while it is being rented out. You can only cover one property during this time but you do not have to choose which property until you sell one.
Ok from your responses to my extra questions this seems to be your timeline
| Sydney Property | Purchase 2013 | Occupied Feb/March 2014 | First produced income December 2015 | |||
| Brisbane Property | Aug 2016 Purchase | April 2018 Occupied | Jan 2022 First Produced Income |
Ultimately the property you choose to cover during the overlap period should be the one with the most capital gain. That is why I have attached a spreadsheet for you to work this out.
The Sydney property starts with the market value at December 2015, this is the one and only market value reset you will receive on this property from then on it is apportioning the gain between days covered by your main residence exemption and days not. Covering Sydney with your main residence exemption up till Aug 2016 is a no brainer but there is no reset again at that point, from December 2015 the eventual gain is calculated then apportioned between days you choose to cover the property with your main residence exemption (limited up to Dec 2021) and days not. Up to Dec 2021 you can choose to cover either property with your main residence exemption but after that the only option is the Brisbane property. The spreadsheet will help you work out which one is best to cover. Note that if you choose to continue to cover the Sydney property with your main residence exemption after Aug 2016 then you will not be entitled to the reset of the cost base to market value of the Brisbane house when first used to produce income because it was not 100% covered with your main residence exemption up to that date.
Dig up all the records you can, on holding costs (explained in the spreadsheet). Holding costs can increase the cost base if they have not otherwise been claimed as a tax deduction. Therefore, the property you are living in is likely to have a bigger increase in the cost base than the one you are renting out. This may swing the choice to cover the Sydney property with your main residence exemption up to December 2021.
Please do not rely on this alone, fill out the spreadsheet and have an accountant check the calculation and assumptions.
