Selling US Home While Tax Resident of Australia

Question

I am a U.S. citizen, became Aussie tax resident May 2012, transferred U.S. family home to a U.S. “living trust” Sept. 2012. (A living trust is basically an estate planning vehicle; title changes, but the tax treatment on the U.S. side remains the same as if the home is still individually owned for CGT/income/etc.)

Home rented from Jan 2013 to Dec. 2018, income reported on my personal Aussie return. I have a property in Australia to which my Aussie personal residence CGT exemption will attach.
I would now like to sell the U.S. property.
Questions:
1. Will the functional currency calculation of gain apply (i.e. I only need to translate the gain into AUD, not cost and proceeds)?
2. Will a realtor’s letter suffice to establish beginning value?
3. Should “cost” be Sept 2012, when property transferred to trust, or Dec. 2013 when I contracted to buy the Australian property)?
4. Will 50% CGT discount apply?
Thank you!


Answer

I don’t know anything about a US living trust so please consider I am relying on what you have said in your question to determine the status of the trust. You are saying that it is not treated as a trust for tax purposes at all, that it is simply an estate-planning arrangement. This would mean that you are declaring the net rent from the property in at item 20R in your Australian tax return, that is net rent foreign income. If this is not the case please let me know.

Now to your questions, my answers very much turn on accepting your word that you technically still own the US house for tax purposes, which I am really not clear on.

1. Will the functional currency calculation of gain apply (i.e. I only need to translate the gain into AUD, not cost and proceeds)?
If it was a distribution from a US trust then yes you would only have to translate the actual gain you received but you are telling me that you still technically own the property and receive the rent directly as your personal income so you will have to translate each item in the capital gains tax calculation at the exchange rate at the date the cost was incurred or sale proceeds received. Please note that the first element of the cost base will be the market value of the property when you became an Australian resident for tax purposes on the basis we assume it is still technically yours not transferred to the trust.

2. Will a realtor’s letter suffice to establish beginning value?
The market value is a question of fact, the proof of which is your responsibility. A registered valuation is the ultimate method but this can be done retrospectively if the ATO ask questions. Just make sure you have photos.

3. Should “cost” be Sept 2012, when property transferred to trust, or Dec. 2013 when I contracted to buy the Australian property)?
Now you have really worried me as to whether we have the ownership right. I just don’t know enough about the “transfer to the trust” to know if it was a CGT event. See if the ownership technically remains the same or a bare trust then Sept 12 was not a CGT event. If you say Sept 2012 is the starting point then you are saying the trust really does own the property, a CGT event took place at market value. If we say you still own the property there is just a trust that is triggered when you die then, assuming you had previously lived in the property you could continue to cover it with your main residence exemption. So….

If CGT event created when property transferred to the trust then the cost would be market value at Sept 2012 when transferred. It is a question of whether ownership really changed then and that it is not just a bare trust.

If you still technically own the property then the cost is market value when you became a resident of Australia for tax purposes or when you first used it to earn rent, depending on which happened most recently.

All in all I think all these dates are so close the market value would be the same.

As for the Dec 2013 date that is all about the question of whether you can cover it with your main residence exemption. If you still technically own the property then you could cover it with your main residence exemption from the date you came to Australia up to Dec 2013. But there is no actual reset available in Dec 2013 that is just relevant for number of days covered by your main residence exemption. The actual reset of the cost happens before that date, sometime around May 2012 to Jan 2013 as discussed above.

4. Will 50% CGT discount apply?
Yes – Assuming owned by you. It is true that non-residents for tax purposes are not entitled to the 50% CGT discount but in your case – Property that is not in Australia – Australia only has a right to tax it during the time you are a tax resident anyway.

If you do decide the property is directly owned by the trust then you also need advice on where the central place of management of that trust is, as that is the country of which the trust is a resident.

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