CGT on Holiday House Received on Divorce Settlement that Becomes a Home

Question

My client inherited a beach house in 1975.

This house was his main residence until 1982 at which time he and his new wife bought a bigger city home together.

They kept the beach house – it was never rented out ever – it has only ever been for private family use.

In 2012, on advice from his lawyer, my client transferred the beach house title into his wife’s name, to protect the asset as well as the main residence in the city.

In 2018 my client and his wife separated and my client moved back into the beach house permanently.

In 2019 my client was awarded the beach house by court order during his divorce.

He has sold the beach house in 2020. Will he have capital gains tax to pay on the period the beach house was in his wife’s name? Or, because it is a ‘former dwelling’ can the former dwelling exemption apply?


Answer

Bloody solicitors! Was he even advised of the CGT consequences!

Transfer to the wife in 2012 is a CGT event at market value. Nothing before that date is relevant – no former dwelling.

If the transfer back to your client was part of a property settlement on the breakdown of a marriage then your client is treated as if it was always in his name since 2012

Fortunately your client can cover it with his main residence exemption from 2018 assuming he is not wanting to cover another property during that time.

The CGT calculation is on a pro-rata basis from 2012 to 2020. Approximately 2/8 of the gain exempt from CGT and 6/8ths subject to CGT

The Gain is the selling price less: The market value in 2012 plus selling costs, improvements, costs associated with the transfer of title on divorce and holding costs not otherwise claimed as a tax deduction as per section 110-25(4) which covers just about everything from 2012 to 2020 ie rates, insurance, repairs, maintenance ie cleaning but these section 110-25(4) costs cannot create a capital loss.

Now there is a very thin possibility that section 118-150 may be able to claw back another 4 years ie 2014-2018 if no one occupied the property and he did not give his main residence exemption to another property. Note also during the time he was a member of a couple he can only utilize a half main residence exemption. With your experience I am sure you can work your way through 118-150 to see if there is any chance your client could extend backwards 4 years from 2018. The key issues are a reno before moving in and no one occupying the property during the 4 year or lesser period. Here is the legislation https://www.ato.gov.au/law/view/document?docid=PAC/19970038/118-150

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