Apportioning your Main Residence Exemption for Rental Before You Move in

Question

When my wife and I were renting in Sydney in 2010, we purchased our first home to live in country NSW. Due to timing with the finishing work and planning the timing of our move, we rented the property for an initial 9 month period, until we were ready to move. This was also due to the settlement taking longer than expected with boundaries needing to be adjusted as the property was a police residence and crown land and we needed to time the move around our kids starting school. We then moved out the renters and into the property 9 months after the initial settlement and have lived there as our primary residence for more than 10 years. Just over a year ago, we moved out of the house and started renting it out again as we have had to move to Canberra where our kids are now in high school.

My question is, if we decide to sell our house within the next few years, will we have to pay CGT on any of the periods we have been renting the property out? My understanding is that if we move back in within 6 years of moving out, we do not have to pay CGT and would like to confirm if this is correct. We will also be seeking financial advice and assistance with our tax returns and hoping we can be provided with further contact details for these services who we can best communicate with remotely. Many thanks for all your help and I look forward to hearing from you.


Answer

There is no way of avoiding being caught for CGT on that property because of that first 9 months. So the whole capital gain must be apportioned pro rata over the whole period of ownership, on the basis of the numbers of days covered by your main residence exemption and the number of days not. If you are renting in Canberra then great idea to leave your main residence exemption on your home while living in Canberra. If your main residence is earning rent then you can only cover it for 6 years with your main residence exemption in your absence. But if you move back in and set up home there, not just for school holidays, then you reset the 6 year clock.

I attach my CGT calculator which will take you step by step though the process. You are able to increase your cost base by any holding costs that have not otherwise been claimed as a tax deduction, reference section 110-25(4) ITAA 1997. This would refer, in particular, to the time you were living there, for example rates, insurance, interest, cleaning materials, lawn mowing etc. A bit of work in this regard will reduce the capital gain. The way the CGT formula works is the costs associated with you living there are allowed to reduce the capital gain before you apportion for the number of days not covered with your main residence exemption.

ATM it looks like it will only be 270 days that are not covered ie the 9 months at the start but unfortunately you still need to do the calculation. I think if you put some estimates into that calculator you will find the taxable gain will not be much.

For example, let’s say you have a $1,000,000 capital gain after deducting all your eligible holding costs. Then sold some time in 2022 but the same month of the year as your originally purchased so I can just work on 365 days for a year. 365 x 12 years = 4380 total days owned of which 270 are exposed to CGT. 270/4380 = 6% of the gain is subject to CGT but then there is the 50% CGT discount $1,000,000 x 6% = 60,000/2 = $30,000 taxable

If you sold in 2027 for say 1,400,000 capital gain then the percentage exposed to CGT would be smaller because your main residence exemption days have extended due to the extra ownership period, that is up until the 6 years has finished. I say the percentage would be smaller though the gain may be bigger, only because it has gone up in value which is a good thing. Th ATO only want a small percentage. But no matter what there will be some tax effect.

Once you get to 2027, unless you move back in again, the main residences exemption will drop off so this equation starts to move back the other way, to increase the percentage exposed to CGT. But bare in mind the ATO only want a percentage of the actual profit you make and what else are you going to do with the money? Use the calculator to do some what if analysis and dust off the crystal ball.

Remember all of this is assuming you are renting in Canberra. If you have bought a home there then you need to make a choice as to which property you cover with your main residence exemption.

It is so unfortunate that our Canberra office has sold up. The closest we have to you now is Burwood or Hornsby.


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