CGT and main residence

Question

RELEVANT FACTS

• Mr A purchases Property X and moves in – Dec 2006.

• Mr A marries Ms B and moves into her property (Property Y) – Mar 2010.

• Mr A signs a rental agreement with a real estate agency for Property X – Jul 2010. Rental income is declared and expenses claimed over the ensuring period.

• Ms B sells Property Y – Aug 2015

• Mr A advises real estate agent to cease advertising the property for rent – Aug 2015

• Mr A and Ms B move into Property X – Oct 2015.

• Tax returns for Mr A and Ms B for 2015/16 were filed but there was no acknowledgement of any Capital Gain Tax event.

• Tax returns for Mr A and Ms B for 2016/17 are yet to be lodged.

PLAN/QUESTIONS

• I am aware that generally speaking, a couple can have only a single main residence between them (although there is the option to go 50-50 on two properties but let’s not complicate things)

• In our situation it is financially advantageous for Property X to be CGT-free ie we have a definite preference to elect for Property X to be the main residence for both parties because the capital gain on Property Y will be small (or negative) due to extensive renovations.

• Given my understanding of the TAA, in our circumstances it appears possible for:
o Mr A to elect for Property X to be his main residence for whole period in which he has owned it (meaning no gain would be assessable once the property is eventually sold
o Ms B to elect for Property X to be her main residence for a period up until when property Y was sold ie Aug 2015. (I am not sure when the start date of this period would be – is it Mar 2010?). This would mean any gain on the sale of property Y would be assessable.

• The intention is for Ms B to lodge an amendment for 2015/16 noting the capital gain tax event ie disposal of an asset and declare any capital gain. I don’t think Mr A would need to given his equity in Property Y is nil

Question 1: Does this approach sound lawful/reasonable?
Question 2: Is there anything else we need to consider?

Answer

Thank you for your response Julia – it was most helpful.

I have a follow-up question regarding amending Ms B’s 2015/16 return. As it turns out, given the cost of renovations (made after March 2010) there was a capital loss made upon selling property Y. Note the loss was made without including any deductions such as interest, rates, insurance etc.

My question is can such a loss be declared in Ms B’s 2015/16 return and hence carried forward to future years (potentially to be used to cancel out gains from, say, future share purchases)?

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