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CGT Question.
My partner and I currently own the apartment above our primary residence and have treated it as an investment. Since purchase in 2016, it has been tenanted and negatively geared.
We are now exploring the possibility of knocking the two apartments into one – which would be our primary residence.
The property was purchase for about $950k and we have end about $30,000 renovating the bathroom, which is currently being depreciated. The property is probably worth around $1.2m
Would this action trigger a CGT event? Is there anything we should take into account – such as combining things like rates/electricity etc. into one address?
Answer
A CGT event is not triggered until the name on the title or ratio of ownership changes. So no, merging the two apartments will not trigger a CGT event.
I am picturing a unit complex here where you bought your home many years ago and then the unit above so there are two separate titles. I suspect you will have a few issues with the Body corporate and council. I can’t tell you anything about the issues of combining rates and electricity. A lot would depend of whether you merge it into one lot and whether your body corporate rights are based on sqm metre or per lot. Anyway, these are all issues for a strata lawyer in your state.
What I do want to draw your attention to is the CGT issues when you sell. You are only entitled to one main residence exemption per couple. A main residence can be on more than one title if both are being used for private purposes. So you could cover both units as your main residence but only if you end up selling them at the same time to the same buyer. Any sale of the upstairs unit in your lifetime is going to trigger CGT because it started life not covered by your main residence exemption. If you manage to sell both to the same buyer then the CGT main residence exemption will be an apportionment based on time and floor space. Not on the fact they are two different assets. This brings your current home into the CGT calculation but in return gives you some main residence exemption for the unit above. The whole capital gain needs to be first calculated before it is apportioned. You need to be keeping records and a diary of use for both properties. Be aware of section 110-25(4). This allows you to include in the cost base absolutely anything associated with the properties that has not otherwise been claimed as a tax deduction. For example, cleaning materials, light globes, rates, insurance, interest, body corporate fees, etc. lots of things that you would normally just think of as private expenses.
On the upside, if you are still claiming the main residence exemption on both properties when you die, your heirs will inherit both at market value at your date of death section 128-15 ITAA 1997. Effectively eliminating the CGT liability that would have applied if the property was sold in your lifetime. Note this does not apply in the case of a surviving joint tenant.
The bottom line is the arrangement is not going to make you any worse off for CGT purposes, you were always going to have some CGT issues when the top unit is sold. You just need to keep good records to minimize it. These records should cover both units for the whole time you have owned them.
Now having said all that I put this bit last because I don’t want to bog down the answer above. Section 118-192 ITAA 1997 is another consideration here. It resets the cost base of a property covered by your main residence exemption, to market value when it is first used to produce income. If up until that time it was fully covered by your main residence exemption. The could be triggered to reset the cost base or your main residence to market value in 2016 when you first rented out the one above if that is later considered part of your main residence. It is an interesting possibility but the only action I would suggest you do now is that you keep some photos of the units before the merge just incase you need a valuer to give you an estimate of the 2016 market value.
