Main residence exemption

Question

Hi Julia
I have a complicated situation. I bought a house with my ex partner in approx 2006 for $298000 (I would also estimate we have spent at least $40000 since then on improvements to the property). We split up in 2012 but for various reasons I still have my name on the property and loan. I have been renting since that time and my ex is still living in the property. It has never been used for income producing purposes.

The property is on the market now for 320000 but we will be lucky to get 300000. The problem is I want to buy a new property with my new partner and use it as my ppor. This is likely to happen before the other property with my ex sells. My questions are
1. Will I be eligible for the 6mth exemption between purchasing the new property and selling the previous property with my ex (and what happens if it does t sell in that 6mth period- hopefully unlikely) or
2. Am I better off just getting my new partner to buy our new house in her name? (Would prefer not to do this due to reduced borrowing capacity) unless I have to to make things clear cut
3. Is it inconsequential because essentially after costs of buying, selling and improvements my ex and I will be making a capital loss anyway

Your advice would be greatly appreciated in this matter
Regards
Josh

Answer

You are right it doesn’t really matter if there is going to be no capital gain. In fact you might even want to argue that it wasn’t covered by your main residence exemption so you can utilise the capital loss. Section 118-145 (6 year rule) is optional, so you don’t have to cover it with your main residence exemption once you moved out. The most important thing is that you cover your new property with your main residence exemption right from the start. Missing out on even a week or two will create a record keeping nightmare.

Section 118-140 is the section on the 6 months overlap you are entitled to between houses. It is 6 months back dated from the date of selling your first house. Section 118-140 (2) a) requires that:
“Your existing main residence was your main residence for a continuous period of at least three months in the 12 months ending when your ownership interest in it ends and “ …

This may mean more than just covering it under section 118-145 it may mean you have to actually live there. I would not take this as a given without a ruling from the ATO but it probably isn’t going to be the way you will go anyway. If you go over the 6 months then you have a partial exposure to CGT which is more trouble than it is worth

Note you can use section 110-25(4) to increase the cost base of the property by any costs associated with it, that have not been claimed as a tax deduction. This would be things like interest, rates, insurance, repairs, maintenance which even stretches to cleaning materials and law mower fuel. Its just that these items cannot be used to increase a capital loss. So it is very clear that you will not make a capital gain, so have nothing to worry about.

Buying in your new spouse’s name will not improve the situation. As a member of a couple you are only entitled to one main residence exemption between you. Though it can be partially spread over two properties. Regardless if you use your main residence exemption elsewhere then the new house you buy can only qualify for half the exemption until you move yours across too.

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