Classic CGT When Couple Both have a Main Residence

Question

Selling second home options Capital Gain Questions for my farm in VIC:

  • Purchased: April 1996. $46,000.00
  • Valuation: Nov 2021 $550,000.00
  • Aim: To minimise/eliminate my capital gain event on this property?

Background

  • We are a same-sex couple (married in 2019) who live in our own home in Melbourne. Our current PPR.
  • The Melbourne house was purchased in 2002 and is in my husband’s name; we both moved in to this residence at this time.
  • The Farm was purchased in 1996, in my name and is located in quiet, rural primary producing area. I lived there until 2002, it has been used as a second home since then. During this time a lot of renovation and maintenance work has been carried out on the property.
  • The Farm has never been rented out and has always had my personal effects there. It is used regularly (fortnightly) as a second home. Currently my car and licence are registered at this address (this helped during COVID ).
  • All of my other correspondence is sent to the Melbourne home (PPR).
  • We are thinking of selling some time in the next few years in order to move closer to family in northern NSW.
  • We have kept very detailed records using the Destiny Track program and have retained the receipts for holding expenses, maintenance and renovation costs incurred for The Farm as well as detailed records for the Melbourne house.
  • We have some questions regarding the future sales of these properties in relation to minimising capital gains tax.

Our Current Options

  • Option 1. We sell Jason’s Melbourne house and move into the Farm.
    Once we move into this property how long do we have to reside there to be able to claim it as our PPR? Does this eliminate triggering a capital gain event?
    We would then sell the farm and use all the proceeds to purchase another house elsewhere, probably in NSW.
  • Option 2. We stay in Jason’s Melbourne house and rent out the Farm.
    How long does the Farm need to be rented out to trigger a reset of the cost base? Am I right in thinking this will reduce the capital gain significantly?
    We would then sell Jason’s house and the Farm and use all of the proceeds to purchase another house elsewhere, probably in NSW.
  • Option 3. We sell the Farm pay the CGT, then sell Melbourne (no CGT) and buy the NSW property.

I have purchased Ban tax’s CGT calculator and have run a number of scenarios. I know that I can adjust the cost base by the amounts it has cost me to hold/maintain/renovate the property over all these years.
I am unsure if the 6 year rule applies here regarding moving in with my husband in 2002?
Do I use 2008 in my calculations?

Hopefully with whichever option we chose there would be some funds left over to divert to our superannuation.


Answer

I trust by the way you worded your question, you understand that now you have the right to be discriminated against like heterosexual couples, you are only allowed one main residence exemption between the two of you.

Nevertheless the ATO would be hard pushed to label you as a couple before you married in 2019 as you maintained separate residents. That is unless you put your hand up and identified yourselves as a couple. I am hoping you didn’t start putting each other on your tax returns as spouses until you married. What address did you put on your tax return?

As there has been no rent income there is no resetting of the cost base under section 118-192 https://www.ato.gov.au/law/view/document?docid=PAC/19970038/118-192 You ask about renting out the farm to reset. This would only be triggered if up until the time of renting out the farm you choose to cover the farm with your main residence exemption. See discussion further down as to whether this is a good choice, ultimately it comes down to crunching the numbers in the CGT calculator.

Regarding the 6 year rule, section 118-145 https://www.ato.gov.au/law/view/document?docid=PAC/19970038/118-145 you have an infinite period of time you can cover the farm with your main residence exemption because it is not earning income. This is the reason you have the choice to use 118-192 discussed in the paragraph above.

Section 118-170 https://www.ato.gov.au/law/view/document?docid=PAC/19970038/118-170 allows spouses to split their main residence exemption. I guess this avoids disputes but what you should be doing is using both your half main residence exemptions to cover the property with the largest capital gain. As long as the property is owned by at least one of the spouses and has been lived in by at least one of the spouses then it is entitled to the main residence exemption it is just a matter of making a choice, before you sell.

Section 118-140 allows you to cover two properties with your main residence exemption for up to 6 months back dated from the date you sell one of the properties. This is the only period where you will be able to claim to properties, there is nothing else to gain by living at the farm, it is just a pro rata calculation. With the 6 month rule there are quite a few restrictions on the property you sell see https://www.ato.gov.au/law/view/document?docid=PAC/19970038/118-140 in particular

118-140(2)
Subsection (1) only applies if:
(a) your existing main residence was your main residence for a continuous period of at least 3 months in the 12 months ending when your ownership interest in it ends; and
(b) your existing main residence was not used for the *purpose of producing assessable income in any part of that 12 month period when it was not your main residence.

Ok now to your question.

The first step would be to use that calculator to work out which property has the most capital gain before any apportioning for the main residence exemption. Pay careful attention to the third element of the cost base. This will be considerable, it covers, interest, rates, insurance and maintenance such as cleaning materials and lawn mowing. This is the case whether it is for the period it is covered by your main residence exemption or not. As you can see in the calculator you work out the capital gain first then apportion the whole gain on the basis of days covered by the main residence exemption and days not. As there is no opportunity to reset either cost base it is just a matter of working out the one with the highest capital gain and applying your main residence to that one. Section 118-145 gives you a choice because you can cover the farm indefinitely in your absence. The next step is working out how to manage as many days as possible main residence exemption on the one that has the least capital gains, after giving 100% main residence exemption to the other. While ever you are not a couple you can cover both so hopefully that will go right through till 2019 depending on what you have been putting in your tax returns. If it is only since 2019 that six months overlap rule is going to make a considerable increase in the ratio of days covered by your main residence exemption so may be worth the mucking about. The legislation does not specify a period of time that it takes to establish your main residence exemption but it does discuss this issue in regard to building a home on land in section 118-150 to allow you to back date your main residence exemption over the vacant land. That requirement is just 3 months. So that is a good benchmark. TD 51 https://www.ato.gov.au/law/view/document?docid=CGD/TD51/NAT/ATO/00001&PiT=19920326000001 lists what the ATO considers relevant.

For example and this is only an example I do not know enough about your circumstances to say what you should do, I have just picked what I think is the most complex yet likely scenario so that you can see your options. As this scenario assumes Melbourne comes up with the biggest capital gain, it is all about what we can do to cover the farm as well.

Farm

  • Definitely covered from 1996 to 2002 as no other property to cover.
  • 2002 to maybe as far as 2019 covered by your main residence exemption because you were not a member of a couple and it was not rented out.
  • When Melbourne sold move back to the farm (at least 3 months) while looking for a place in Northern NSW. Covered from 6 months just before Melbourne is sold then while you are living there and can even cover for 6 months while on the market and you are living in northern NSW covering that property with your main residence exemption.

Melbourne

  • Assume has largest capital gain so direct 100% main residence exemption to it.
  • Covered from 2002 to 2022 when sold so no CGT at all

If this fits you are looking at no CGT on Melbourne and maybe only paying CGT on the 1.5/26th of the gain on the farm. That is because there maybe only 2 years between you becoming a member of a couple and the Melbourne property selling then reduce that 2 years by the 6 months overlap from section 118-140. Further, the actual gain may be quite low when you look at all the renovations and holding costs associated with acreage. Then consider using superannuation contributions to reduce the tax to effectively 15%. If you can’t BAN TACS at least minimise it legally 😊

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