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Dear Julia,
I am retirement age and still happily working. Unfortunately, my husband had a stroke 2 years ago and is unable to earn an income.
He is only eligible for the pension in March 2027. We have been considering our retirement options for the coming years. We currently have no debt on our home.
Are you able to advise us on capital gains tax should we downsize. Below is our situation:
- September 2006 Purchased property $660,000
- Split block, moved house and renovated.
- January 2008 House tenanted.
- July 2008 Sale of split block of land $515,000
- March 2024 Residential Valuation upon moving into rental property as our place of residence $1,200,000
- Home was refurbished upon tenant moving out and current value $1,660,000.
- Was it prudent to obtain a residential valuation in 2024 due to us now making this our primary place of residence or is this irrelevant?
I was wondering if you could advise us of calculation regarding potential Capital Gains tax of an investment property which we have now lived in since April 2024.
We potentially will only downsize in 5 years’ time.
Thank you for your input in this regard.
Answer
I can’t encourage you enough not to downsize, just close off rooms and help with the yard is probably cheaper over your lifetime than real estate agent fees to sell, let alone stamp duty to buy another house. Here is a link to a free calculator:
https://www.bantacs.com.au/shop-2/reverse-mortgage-calculator/ that, while a little rough, will help you consider the pros and cons of downsizing. It also promotes the idea of a reverse mortgage. They are expensive, about 9% but Centrelink offer one for only 3.95%.
https://householdcapital.com.au/get-started/home-wealth-calculator/
Centrelink will pay you, in addition to your pension, another 50% of the maximum age pension. The trouble is you can’t get a lump sum reverse mortgage through Centrelink, other than 12 months payments in advance. So, ideally you go to the sharks first if you need a lump sum then to Centrelink for help with regular living expenses. Centrelink are happy with a second mortgage.
You have an added reason not to sell, in your particular circumstance, in that if your home is still covered with your main residence exemption when you die your heirs will inherit it at market value at DOD so all this CGT exposure will disappear.
I assume your property is held as joint tenants which means that on death the surviving spouse is treated as holding the property the same way as the deceased did, but all the CGT liability moves to the survivor. This will not happen if you hold the property as tenants in common. So I encourage you to change this immediately as long as you do not feel your will will be challenged. Then make sure that each will leaves the house to each other. If the survivor of the two of you inherits the property through the decease’s will, then there is a reset to market value at DOD for the cost base for half the house. Reference section 128-15. Effectively halving the tax payable should the survivor sell in their life time. There is no CGT triggered by changing from Joint ownership to tenants in common 50:50 because the ratio between the owners stays the same. Should be no Stamp Duty either. Either one of you can contact the titles office and organise it. Here is a blog that includes a discussion about how the change works. https://www.bantacs.com.au/Jblog/death-cgt-and-your-home/#more-1375 Refer the Harley and Rose example.
You are right that valuation is irrelevant. The CGT liability is calculated on number of days covered by your main residence exemption vs number of days not. Just a pro rata calculation right back to the day you first purchased the property. I attach the Main Residence spreadsheet from the Getting Your Affairs in Order product that will help you keep the right records just in case you do have to sell in your lifetime. The gold is in section 110-25(4) which will allow you to increase the cost base by all holding costs not otherwise claimed as a tax deduction i.e. rates, insurance, interest, repairs and maintenance while you are living there. The first element of the cost base is going to be the original price you paid for the property less the value of the land you sold. The value is what it was worth when you purchased the property. So you are apportioning the original price paid to get the original price of the property you have now. When you sold the vacant land you would have had to apportion it out to do that CGT calculation so that should be on record somewhere. Then you add in a portion of the original stamp duty costs that represents the starting value of the home you have now. Same apportionment with conveyancing to buy. When it comes to subdivision costs these can be split equally between the two titles unless the cost is specific to that side. For example the cost of moving the house would form part of the cost base of the house and land you now have. All that is required is a reasonable method of apportionment. I encourage you to work through this spreadsheet, if you every sell the information you have there will save you heaps in CGT. So while tiresome it will probably work out at a very good hourly rate as, at a glance your CGT liability is huge. There is also an estimator of the CGT payable in the spreadsheet but it does not yet take into account the proposed changes to the 50% CGT discount. Can’t really incorporate that until we see the final legislation.
The absolute first thing you need to do now, providing your will is unlikely to be challenged is change from joint tenants to tenants in common 50:50.
Please note this answer is limited by the information you have provided and should not be relied upon without further professional advice on your particular circumstances.
