Ask Ban Tacs Question
I would appreciate your advice on the following in regard to Capital Gains tax.
My wife and I as joint tenants own a property at Nerang, Qld, which we held as our primary residence for many years.
Since moving to Sydney 4yrs 9 mnths ago we have rented it out.
Approx 3 yrs ago we moved into a dual occupancy dwelling which we built for ourselves and our daughter and family.
It is one building but divided by a fire wall. Title has as tenants in common my wife and my daughter.
The land cannot be divided as Torrens or Strata title.
Do we have to pay CGT if we sell the dual occupancy dwelling seeing that it is one building on one title owned by mother and daughter?
Can the Nerang property be sold free of CGT seeing that it has been rented for nearly 5 yrs?
I look forward to your reply,
Regards,
Ron Osborne
Answer
The short answer is no you or your daughter do not have to pay CGT on the sale of the duplex if you both choose to cover it with your main residence exemption during the whole period of ownership. The trap is if you do this you cannot cover another property with your main residence exemption at the same time so in your case you will be exposing the Nerang property. The Nerang property will not affect your daughter’s ability to cover her main half with her main residence exemption but she may have other issues.
Congratulations you did very well with the names on the title. Your wife is entitled to use her and your main residence exemption to cover the part of the property owned by her and your daughter is in the same position. This is of course providing you have not covered another property with your main residence exemption during that time.
Where you place your main residence exemption is a choice you don’t have to make until you sell one of the properties. You have a period of 3 or more of years where you own two properties that you want to cover with your main residence exemption and you won’t even qualify for the 6 months (Section 118-140) overlap rule because the Nerang property is rented out.
Your daughter and your wife look at their half’s of the property independently depending on what their circumstances are.
You need to calculate the gain on both the Nerang property and your half of the duplex to see which is going to give you the greatest gain during the double up period and cover that one with your main residence exemption. (Section 118-145 1997 ITAA). Note you can only choose to cover Nerang for up to 6 years while it is earning income, unless you move back in again before the 6 years is up or leave it vacant from the 6 year mark onwards. Alternatively, you may choose to cover the current property you are in rather than have to continue to keep records the whole time you live there. You see if you expose your half of the duplex to CGT the CGT for the whole period of ownership has to be calculated and then apportioned between days covered by your main residence exemption and days not. Note section 110-25(4) ITAA 1997 allows you to increase the cost base (decrease capital gain) by any holding costs that are not claimed as a tax deduction. This would be a higher amount in the property you are living in. It can include rates, insurance, interest, cleaning materials, lawn mower fuel, repairs etc….
TO calculate the Capital Gain on the Nerang property:
Start with the market value (less plant and equipment) when you first rented it out (section 118-192)
Add any costs since that date that you have not claimed a tax deduction for including selling costs
Reduce this amount by any building depreciation you qualified to claim while it was rented
This gives you your cost base. Deduct this from your selling price (less plant and equipment) to get the capital gain. This capital gain is then apportioned between days covered by your main residence exemption and days not, choice needs to be made re the 3 to 4 year overlap but the first couple of years may as well have your main residence exemption unless you had another property not mentioned. Note this overlap period starts when you purchased the land you built the duplex on. And the whole period of apportionment for the Nerang property is from the time you first rented it out to the time you sell it.
I am assuming you moved into the duplex as soon as possible after it was constructed.
To calculate the capital gain on the duplex:
Cost base is original purchase and construction costs (less plant and equipment) plus any expenses in anyway associated with the property including cleaning materials. Also purchase and selling costs. Halve this to get your share of the cost base. Then halve the selling price (less plant and equipment), deduct from this your share of the cost base to get your capital gain. Then apportion this gain between the number of days you choose to cover it with your main residence exemption and the number of days you don’t.
Make sure you get an Accountant to help you with the finer points of the CGT calculation.
