Juggling Main Residence Exemption Between Two Rentals

Question

Hi Julia,
I had been living in my house (Property 1) since first purchased in Dec 2005 (100% owned by me) as my principal place of residence (PPR).
On 10/6/2019, I moved out of Property 1 into a rental property not owned by myself or my spouse, where I am currently residing.
On 22/7/2019 Property 1 was rented out and has been earning and income to date.
I have continued to treat Property 1 as my PPR since moving out (Section 118-145).
I plan to sell Property 1 in 2022 and move into my investment property (Property 2) which I have owned (100%) since 27/1/2017, as my new PPR. Fyi, I will be building a new house at Property 2 before I move in, so there will be a transition period between selling Property 1 and moving into Property 2 this may take up to 18 months.
My question is, do I need to do anything with Property 1 (such as move back into it or not earn an income from it for any period of time) before I sell it to retain my full PPR exemption and not have pay any CGT on the sale?.
And can I use the main residence exemption for both Property 1 and Property 2 for a period of 6 months (Section 118-140) from the sale of Property 1 even if Property 2 is still being rented/built in this period? If so when would this 6 month overlap need to start and finish e.g. on contract signing, on moving in to Property 2?


Answer

I am assuming that you are a resident of Australia for tax purposes and will be during all this time.

This is an excellent example to show case how section 118-145, 118-140 and 118-150 can work together so I really appreciate that you have allowed it to be published.

Here are the relevant sections

118-140 https://www.ato.gov.au/law/view/document?docid=PAC/19970038/118-140

118-145 https://www.ato.gov.au/law/view/document?docid=PAC/19970038/118-145

118-150 https://www.ato.gov.au/law/view/document?docid=PAC/19970038/118-150

Section 118-150 can cover a property with your main residence exemption for up to 4 years (subsection (3)) before you move into it providing:

118-150 (5) that no one else is living there during that time

118-150 (6) you cover no other place with your main residence exemption during that time with the exception of the 6 months overlap rule 118-140

118-150 (3) you move in asap after building complete and cover it with your main residence exemption for at least 3 months

118-150 (1) you renovate or build.

Section 118-140 back dates 6 months from the time you sell the first house but only if it was not used to produce income in the 12 months before sale and you lived there for at least 3 months. So as the situation now stands you do not qualify. You may consider moving back into it to create this situation. This section only talks about ownership period so it is settlement date for Property 1. Strangely enough section 118-140 does not place the same restrictions on Property 2, it can be rented during that 6 month period. This section has potential for planning if you think it is worth it. If you come up with a strategy to make this work, please use Askbantacs again as there are many twists and you will need to give me more information about timelines with Property 2.

Section 118-145 does not require you to move back in or even sell after the 6 years just that you can only cover the property for 6 years so it is a pro-rata CGT calculation.

Also consider section 118-192 which would have forced you to reset the cost base of property 1 to market value at the date it was first made available to rent. If you are making a choice between which property to cover with your main residence exemption during an overlap period you need to crunch the numbers to be sure that there is going to be a capital gain worthy of your main residence exemption. Don’t forget selling costs in that calculation.

Please consider that you are always going to have a pro-rata CGT liability on Property 2 so keep receipts for everything even cleaning materials and lawn mower fuel. Also rates, interest, insurance, plants and garden maintenance, light globes …….. Reference section 110-25(4)

In direct answer to your question. You do not have to do anything to sell Property 1 completely covered with your main residence exemption but you will not be able to cover Property 2 with your main residence exemption until you stop covering Property 1 and Property 2 has no one living there.

A lot to consider here and you may need to crunch some numbers, I encourage you to run your final decision past your Accountant.


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