Getting the best CGT results juggling 3 properties

Question

I have three properties, they are as follows:
One, was my principal place of residence but is now rented out, I have owned it for 12 months and it has appreciated by around 150K. (Purchased off the plan).

Another, owned for 12 months small appreciation, currently rented, Investment property only.

The third, currently under construction, nearly completed. Expected to have reasonable capital growth since signing the contract, due to be completed in around 3 months.

I live in none of these and rent another place.
What I would like to know is, from a tax perspective, if I want to sell some or all of these in approximately 12 months from now to fund a principal place of residence am I subject to capital gains tax on the sale. I’d also like your view on the best way to minimise tax for the property that is currently being constructed, is there anything specific I should consider?

Answer

For properties that you purchase off the plan the 12 months starts from when you signed the contract even though the strata is not yet in existence so you should be fine with the 50% CGT discount for all properties.

Note the 6 months overlap rule section 118-140 cannot be used when you sell your first property because the original home has been rented out. More about this section later.

The only tax concession you have beyond the 50% and the overlap is the main residence exemption and it certainly seems to be worth covering the first property with that as it appears to have the most capital gain, something to go through with your Accountant when things are more certain. At this stage the first property is the only property you can cover with the main residence exemption because it is the only one you have ever lived in.

Section 118-145 allows you to continue to cover the first property with your main residence exemption for up to 6 years while it is rented out so you may well consider covering it until it is sold. It is a matter of doing the numbers. You see section 118-192 will automatically (no option) reset the cost base of the first property at the date you first rented it out. That is assuming you moved into it when the construction was completed and covered it with your main residence exemption until it was rented out. Now if most of the growth happened before it was rented out and when you sell the first property is only worth $20k more than the market value when reset, then it may not be worth worrying about keeping it covered with your main residence exemption as the selling costs will probably offset the gain. Just depends on the price you get when you sell.
If it is the case that there is very little benefit in continuing to cover the first property with your main residence exemption after the reset then you should look around to put it to better use from that date.

Consider moving into the property currently being constructed as soon as construction is completed. Section 118-150 will allow you to cover it with you main residence exemption right back to the time you signed the contract. I am assuming you signed the contract for this property after you rented out the first property. I am thinking here if all the gain on the first property was before the reset let’s move your main residence exemption to this third property but to do that you have to move in immediately it is habitable.

Having set up home in the third property you could then proceed to sell the other two. Not much in the way of tricks to avoid the CGT on the second property unless you want to put some of the sale proceeds into super.

Then you can start constructing or searching for your forever property. As long as you don’t rent the third property out you can utilise the 6 months overlap rule section 118-140 here to cover both the third property and your forever home dating back 6 months from the date of sale of the third property. This could well mean that you sell the third property also free of CGT.

Assuming you want your final home to be fully covered with your main residence exemption right from the start. You will need to move into it as soon as it is ready to live in.

I don’t know enough about your situation to make sure you fit into all these possibilities. This is food for thought and if it is possible to move into property 3 it is worth running all this past your accountant when you can tell him or her what sort of forever home you will be buying and when.

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