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I purchased a property with my wife in Jan 1986 for $125,000
We separated and I moved out of the house in July 1996 and we were divorced in Feb 2001.
The family law court orders in 2001 at divorce stated that my former wife could occupy the property and the property not be sold until the youngest child turned 18 or completing their education including any first degree whichever was the later. Court orders also stipulated that my former wife receive 55% of proceeds of sale of the house and I receive 45%.
During this time, from initial separation in 1996 I paid child maintenance for two children until they were 18 years old. My former wife paid the mortgage and maintained the property as per family court orders.
The event to allow sale of house (youngest child finishing first degree) occurred in November 2012 and the house was sold in Jan 2013 for $865,000. Following settlement of costs my former wife received 55% of proceeds ($419,713) and I received 45% ($343,402).
Also during this time I remarried and with my wife purchased a house in Feb 2005 in which we currently live.
My question is whether there is any capital gains tax implications and if so, how is this calculated.
If the calculation component requires additional payment I am happy to pay additional. Please advise.
Thanks for your assistance
Answer
Ok so the property never changed hands so none of the rollover relief on divorce applies. Accordingly, you need to apply your main residence exemption to this property as long as you can.
Section 118-145 allows you to cover a property with your main residence exemption for an infinite period of time after you move out providing it is not earning income. Which certainly seems to be the case with this house.
How the proceeds of the sale are divided up for family law purposes won’t change the fact you owned half the house and therefore half the capital gain is yours.
Your problems start in 2005. As a member of a couple you are only entitled to one main residence exemption between you. You are quite entitled to use your 50% exemption to fully cover your 50% share of the original home but this means that your current spouse can only cover half of your new home with her main residence exemption because as a member of a couple she is only entitled to cover half a home.
So the big question is where do you put your main residence exemption after 2005? On the house that has just been sold or on the 2005 home? A lot depends on how long you are likely to keep the 2005 home as records have to be kept for the whole period of ownership and then the gain has to be apportioned pro rata. Likewise if you expose your original family home from 2005 to 2013 you have to look at the gain over the whole period and apportion it going right back to your original cost base of $125,000. It is worked out on a daily basis but just for simplicity and it is very simplistic because of course there will be lots more in the cost base than just the purchase price. If you had a gain of $865,000 – $125,000 = $740,000 half is yours $370,000 1986 to 2005 covered 19 years not covered 8 years. $370,000 / 27 x 8 = 109,630 of the gain not covered after the 50% CGT discount that is $54,815 extra taxable income to you. Hopefully a lot less than that by the time you take into account buying, selling costs and improvements you or your former wife made during the time you owned it.
I am inclined to feel that covering the original house with your main residence exemption will give you a better outcome but it does depend on how much actual capital gain you made. You see the new home having been purchased after 20th August, 1991 will qualify under section 110-25(4) to increase its cost base by any holding costs. This includes insurance, interest, rates, repairs, maintenance etc. Think about keeping all your woollies dockets because this can include cleaning materials, light globes, lawn mower fuel, just about anything you can think of. So with good record keeping you could significantly reduce the CGT on the newer property.
