Choosing Which House to Cover With Your CGT Main Residence Exemption

Question

Hi,

I am selling my PPR where I have lived for 5yrs 5mths.

My current PPR – settlement date was 5/8/2016 and moved in by 11/8/2016

My previous PPR that i want to move back to – settlement date 16/6/2014

First moved in 28/7/2014 [as that was when tenant moved out] until 11/8/2016

I am thinking of moving back to my previous PPR that has been rented for 5yrs 5mths and selling it. What would be my situation in regards to capital gains tax?

Thank you.


Answer

Well that first tenant makes a difference. Unfortunately, because your first PPR wasn’t your home right from the start it will always have a pro rata CGT exposure. Looks like you second PPR has always been your home up to the time you sold it so qualifies for a complete exemption from CGT but you have a choice (section 118-145 ITAA 1997) whether to cover the first or second home during the time you owned your second home. Some people take a bird in the hand approach and put the exemption on the one they are selling. Others make an estimate of the situation and put their PPR exemption with the property they think is going to make the most capital gain. I have attached my CGT calculator so you can do a bit of what if analysis between the two properties.

Duplicate the spreadsheet and run one for each property. Put in all the amounts for the whole time of ownership then manipulate the number of days covered by your main residence exemption to work out where your main residence exemption is most profitable. Basically, it is the selling price less the cost base that is subject to capital gains tax but you get to halve that for the 50% CGT discount. The spreadsheet lists what the cost base is made up of, the original cost, stamp duty, legals, selling costs. This amount is reduced by any building depreciation you qualified to claim against the rent on your first home.

In particular section 110-25(4) ITAA 1997 allows you to increase the cost base by any costs associated with holding the property that you have not otherwise claimed as a tax deduction. Such as insurance, rates, interest, repairs and maintenance while you are living there. This means your new home where you lived for over 5 years may have a larger relative cost base then your first home where a lot of the holding costs have been claimed as a tax deduction. Note these holding costs cannot be used to create a capital loss, only to decrease your capital gain as far as zero.

So put your numbers in the calculator then work out the percentage of days covered. The first home you would definitely cover with your main residence exemption from 28-7-2014 till you purchased your second one. It is from 5-8-2016 that you need to choose.

If you choose to cover your second home with your main residence exemption for the full time you own it then Section 118-140 will allow you to cover both properties back 6 months from the date you sell your second home. So for example if you sell your second home in March 2022 you can cover your first home with your main residence exemption from March 2022 back to Sept 2021 even though it was rented during that time. Though this is just a little bonus that probably shouldn’t play a big part in your choice.

I think after you have worked through the calculator and come to a decision you should run it past your Accountant just to make sure you have covered everything and fully understand what I am saying here.


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