Main residence exemption

Question

Hi

I had a property in Sydney purchased in Nov 1998 for $330k that was my family home until we left Sydney and rented out the house in Feb 2006. In the mean time I rented a place in my new location until I bought another house and moved into it in March 2011.

In October 2013 I sold my house in Sydney to My son for $440k.

I want to know if I can claim main residence exemption on my Syd home. I have heard about the 6 year rule and wonder if and how I can reduce my CGT?

Answer


The cost base of the old house is its market value Feb 2006. You can then increase this amount by anything associated with the property that you have not otherwise claimed as a tax deduction. Add to this your selling costs, reduce it by any building depreciation you were entitled to claim to get your cost base. The capital gain is the difference between this and the selling price.

As you did not own another house from the date you first rented the property out till March 2011 then there is no doubt you can use section 118-145 to cover it with your main residence exemption. You can even do this up to February 2012, even longer if there were periods that it was not earning income. The six year period starts all over again if you moved back into the house and lived in it as your home. I will discuss the problem of the overlap period latter.


The CGT calculation, if you choose to cover with your main residence exemption up until February 2012, is as follows. You will have 20 months where it is not covered by your main residence exemption. 6 x 12 = 72 month covered by your main residence exemption. So you take the capital gain made since February 2006 and divide it by 92 months (technically it should be based on number of days) then multiply it by 20 months to get the portion of the gain that is taxable. Halve this for the 50% CGT discount and include it in your taxable income. Note if you owned the property with a spouse then only half of this discounted amount would be included in your taxable income and half in theirs.

Now the problem this all creates is that your new home will be exposed to CGT between March (assuming date of signing the contract) 2011 and February 2012. Just as described above you will have to calculate the gain for the whole period you own the new house and apportion on a days covered to days not covered basis. The capital gain on your new house may not be so bad because you can use section 110-25(4) to include in its cost base everything from interest to cleaning materials as long as they have not otherwise been claimed as a tax deduction. But you may not like to have to keep records for the rest of the time you own your current home, I certainly wouldn’t even if it was going to save me some tax, now. Note if the place is still your home when you die then your heirs inherit it at market value at DOD so this CGT liability will disappear.
If you prefer to expose the older house to CGT for the overlap period then it is just a case of adjusting the ratio in the calculation to reflect the extra months not covered by your main residence exemption.


A possible trick. Did your son live in the house before you sold it to him? If he did and you had an agreement with him to buy your old house then CGT event B1 would allow you to cover the property with his main residence back to when you agreed to sell it to him. If it is possible for this to apply to you please let me know and I will give you more detail.

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