Liability for CGT

Question

Hi,

I purchased a property in May 2005. I moved in straight away and lived in it for 9 months (until Feb 2006).

I rented out the property out for 3 years (Feb 2006 to Feb 2009) while renting a different place for myself, so I figure the property I owned could still be classed as my main residence during that time.

In March 2009 I will move back into the property until around July this year when I intend to buy another property and move straight into that one.

If I sell the first property either:
(a) Later this year, around the time I buy the second one; or
(b) At some later date, after renting it out again for a while

Will I be liable for CGT and if so how do I calculate the proportion of the CG that is taxable?

It is my understanding that I would be exempt from CGT at least up until the point where I establish a new main residence. How does buying and moving into a second property change things?

NOTE: I will probably move to the UK either late this year or early next year, and could cease to become an Aus tax resident during the 2009-10 financial year. Does this affect CGT liability?

Lucy

Answer

Lucy

When you first rented out the property in Feb 2006 the cost base on the property is reset to the market value at this time and the acquisition date is also reset to Feb 2006. From that date it can still be exempted as your main residence but if there is any CGT exposure the gain from Feb 2006 is calculated and then apportioned between the time it was covered and the time it was not. This is just done on a per day basis.

You can cover two properties with your main residence exemption for 6 months but this 6 months is back dated from the time you sell the first property and you cannot rent out the first property for 12 months before you sell so I think we can give up on utilising this concession.

From July 2009 you will have to choose which one of these properties is covered by your main residence exemption. If you are a diligent record keeper there is a lot to be said for putting the exemption on the rental. You see any property purchased after 20th August 1991 can include in its cost base any ownership costs not claimed as a tax deduction this includes cleaning, repairs, rates insurance etc. So the property you live in will be more likely to have a smaller capital gain than a property you rent out.

To calculate the gain on the rental you take the market value at Feb 2006 add to it selling costs, ownership costs while you were living there (ie not claimed as a tax deduction) improvements etc and deduct any building depreciation you have claimed. The difference between this and your selling cost is the capital gain. Apportion this on a daily basis between the days since Feb 2006 that it was covered with your main residence exemption and the days it was not, to get the taxable gain. Halve this and add it to your taxable income.

If you move overseas you can continue to exempt the new home (providing you have lived there before you leave) with your main residence exemption for up to 6 years while it is rented out (indefinitely if it is not earning income). Moving overseas will not trigger any CGT event on the houses. You will still be liable for CGT in Australia if you sell them while you are overseas, at non resident tax rates but the 50% discount applies and the main residence exemption subject to the discussion above.

So in answer to your quest is if you sell the first property before you buy the second you will have no CGT liability. If at anytime you have two you have to choose which one is covered by your exemption. Going overseas only affect your tax rate not when you pay capital gains on the properties.

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