We bought a strata unit in Geelong in 2003, whilst living overseas paying $191,000. We lived in the UK from 2000 we returned to Australia in September 2021 and are now living in the unit. The current value is estimated to be $420,000.
If we were to sell how much CGT would we be up for?
We are both in our mid 60’s – is there anyway to reduce the CGT we would have to pay?
We have been told we have to live in the unit for as long as we rented the unit to negate the CGT, is there any truth in this?
Your help would be appreciated.
There is no truth in the advice that living in the unit for as long as you rented it will relieve you completely of the CGT but it does change the percentage of the gain that is exposed to CGT. Of course the longer you live there the higher the gain too.
I attach a spreadsheet that will help you estimate the amount of CGT that is applicable.
The key points to your situation are:
- From 8th May 2012 non residents are no longer entitled to the 50% CGT discount.
- 2003 to 8th May 2012 Entitled to 50% CGT discount
- 8th May 2012 till September 2021 when you arrived back in Australia (I assume) no 50% CGT discount.
- September 2021 to when you sell (assuming all the time from Sept 2021 you cover it with your main residence exemption) exempt from CGT as your main residence.
- You do not qualify for any reset to market value at any time it is all a pro rata calculation.
Example of the Pro Rata
Let’s assume you purchased the unit in September 2003 and you sell it in September 2023. That is a total of 20 years ownership with 2 years covered by your main residence exemption. 18 years not covered by your main residence exemption. 10% (2/20) of the gain is exempt from CGT. Of the remaining 18 years that are exposed to CGT 8 years and 8 months are entitled to the 50% CGT discount. 8.67 years / 18 years = 48% x 50% = 24% which is the discount you are entitled to on the portion of the gain that is exposed to CGT.
The portion of the gain that is exposed to CGT is 18/20 = 90%
So using the spreadsheet attached you calculate the whole capital gain for the whole period. This effectively means that expenses that increased the cost base while you were living there proportionally (90% in this example) can reduce the capital gain for the time you didn’t. It is all just pro rata. While you start the cost base calculation with the $191,000 you paid there is a lot more that goes into it. Let’s assume you make $100,000 capital gain after every cost is taken into account. $90,000 of that gain is not exempt but you are entitled to a 24% CGT discount on it so only $68,400 is actually taxable and sounds like that will be halved to go into your individual tax returns.
You can consider contributing some money to superannuation and claiming it as a tax deduction to offset this gain, bringing the likely effective tax rate down to 15%. You must put the money into the super fund before 30th June in the year you sign the contract to sell the property. You should seek advice on your particular circumstances on exactly how much you can and should put into superannuation. This is just a note, that at your ages that is probably the most tax affective strategy and you may well be able to access the money you contribute.
Tip – Holding costs. Make sure you take full advantage of recording, in the attached spreadsheet, holding costs, for example rates, insurance, interest, body corporate fees, repairs and maintenance that has not otherwise been claimed as a tax deduction ie incurred while you are living there. These will proportionally reduce the capital gain for the time you weren’t living there.
It is quite possible that the longer you live there the less the CGT but that does depend on how much capital growth you continue to get. While the percentage covered by your main residence exemption will grow, so probably will the value of the unit and so the capital gain. Though the increase in the cost base by the holding costs while you are living there may be greater than the increase in the selling price.
Warning – Do not move back overseas before you sell the unit. If you are a non resident for tax purposes when you sell, all the main residence exemption period will be wiped.