Spouses Shared Main Residence Exemption and Divorce

Question

I purchased a property in August 2013 with my then partner for $370,000. It was intended as our main residence but we were not able to move in until January 2014 due to work commitments interstate. During this time, a period of 5 months, we rented the property via an agent.

In Jan 2014 we moved into the house and it became our main residence.

Later that year we split, although we did not transfer the property to my name solely until Dec 2018, but it was my main residence (and solely mine) that entire time. We were able to do this without paying any stamp duty as it was legal transfer due to a defacto split.

From Dec 2015 until the current time, I have periodically rented out my whole home via Airbnb while I travelled or was away for work. During this entire time it remained my main residence, although I understand that this means CGT would still apply proportionally for the number of days it earned income vs the number of days I was physically living in it. In total, I leased the house before we moved in for 145 days, and from 2015 it has been available/leased on Airbnb for 632 days. I have owned it for a total of 2721 days.

I have recently (2.5 months ago) purchased another house with a new partner, a one hour distance from the first, which we have moved into. During that time I have kept the first property on Airbnb and spent intermittent time there. My mail is still addressed there, bills are still in my name, and I am still enrolled to vote there. My personal belongings have now all been removed.

I am trying to understand my best options re this first house and CGT considering the fact that I have previously earned income from it while using it as my main residence. From the research and reading I have done, it appears that if I continue to treat this property as my main residence after moving out for tax purposes, and then lease it, that the 6-year exemption would apply in terms of CGT. Is this correct?
If so, am I correct in understanding that doing this will put me in the best position financially in terms of maximising my income from a sale and minimising CGT?

If I understand correctly, if I were to sell the property today, CGT would be calculated by taking the total gains (which I estimate to be around $250,000), multiplying it by the days it was available for income (797) and dividing it by the days I have owned the property (2721), which would total $73,227 as the assessable amount (to which the 50% discount is then applied). If, however, I were to hold onto it for another four years, and the value increased by a further $125,000, taking the total gains to $375,000, the days it was available for CGT applicable income remains the same at 797 but is divided by a much higher number of days owned as a main residence (4181), so that even though the gains are higher at $375,000, the CGT assessable amount still works out to be similar at $71,484. So I’d end up paying a similar amount of CGT, but making significantly more income from rent and from capital gains. Have I understood this correctly?

It seems counterintuitive that in order to minimise the CGT I need to move out into my second property while continuing to list the first as my main residence, but that seems to be the crux of it (and I do understand that by doing this, I would then not be able to claim main residence CGT exemption for that period for the second property – but from what I understand my partner could still claim this for his 50% of the second property during that time?)

Lastly, assuming that I am correct in understanding that the 6-year rule will still apply to me even though I used my property for income in this way previously, and even though I am now living in a second property that I own, will it be possible for me to continue using Airbnb as the form of rental income during the 6 year period and still be exempt, provided I have moved all my belongings out, changed my voting enrolment etc? This will mean that the bills will need to remain in my name but in all other ways I believe I could prove that it was no longer used as my main residence. What records would I need to keep to be able to do this?

Thank you for your help.


Answer

Lucy,

I can see you have the ability to analyse how to make the most of your situation if I give you the laws that you need to consider. So I have answered your questions, further down, rather bluntly because these key points should allow you to work out your options.

Key Points:

The rollover on marriage breakdown applies to mean that you completely stand in your ex’s shoes for the whole time the property was owned by him. You used it in the same way he used it. https://www.ato.gov.au/law/view/document?docid=PAC/19970038/126-5

Airbnb is diabolical when it comes to your main residence exemption. You cannot use the absence rule, while on holidays, because you have not set up a home elsewhere so you are not absent, just on holidays. This is a relatively new opinion by the ATO and I hope someone, one day challenges it as I think it should be if you have signed over the right to be there by giving the guests exclusive use then you are absent. For all my rants about this https://bantacs.com.au/Jblog/the-tax-and-record-keeping-consequences-of-holiday-rentals-such-as-airbnb/#more-190

As you first rented the property there is no opportunity anywhere to reset the cost base to market value. It is all pro-rata and you seem to have a pretty good understanding of that. Though you might need to rejig the numbers as the days not covered by your main residence exemption are any days that it is advertised as available for rent, even if you are still living there waiting to leave when you get a tenant. You should be ok if you just advertise it for a future date with earlier dates blocked off on your calendar.

A couple are only entitled to one main residence between them. You have the choice of covering either property because you have lived in both but this means that if you leave your main residence exemption on your old property it will only be half-covered (again worked out on days) and your new house will be only half covered or your new partner and you can choose to combine and cover one property, ideally the one with the most capital gain. Even though your new partner has not ever lived in your old house he can still move his main residence exemption to it because his spouse (you) has lived there.

The 6-year rule will only cover the portion of your house not being used to produce income at the time you become absent. This doesn’t seem to be a problem for you but I just want to make sure you do not move out after hosting Airbnb guests while you were still living there or at a time that it was actually advertised as the whole house is available on Airbnb so considered to be 100% being used to produce income at that time so you can’t start the 6-year rule at all.

Section 110-25(4) allows the holding costs of a property, that have not other
wise been claimed as a tax deduction, to be used to reduce a capital gain (can’t increase a capital loss). Your capital gains tax calculation will first calculate the whole gain for the whole period of ownership and then apportion to period used to produce income. This means that holding costs while you were living there can proportionally reduce the capital gain for the period you were not. So see what you can dig up. Not limited to but includes – interest, rates, insurance, repairs, cleaning materials, light globes, lawn mower fuel……….

Answers to your questions:
1) It appears that if I continue to treat this property as my main residence after moving out for tax purposes, and then lease it, that the 6-year exemption would apply in terms of CGT. Is this correct?
Yes but you are only entitled to half a main residence exemption.

2) If so, am I correct in understanding that doing this will put me in the best position financially in terms of maximising my income from a sale and minimising CGT?
Only if you expect the old house to have far better capital gain then the new house. It is one or the other. Or half of one and half of the other.

3) So I’d end up paying a similar amount of CGT, but making significantly more income from rent and from capital gains. Have I understand this correctly?
You understand the concept well you just need to consider what I have said above, which will change the days. And when you take into account exposing the new house may not be any real saving.

4) but from what I understand my partner could still claim this for his 50% of the second property during that time if he considers it his main residence?
Yes he can cover his half. The point is you personally can only cover half the old property during the time you are a couple.

will it be possible for me to continue using Airbnb as the form of rental income during the 6 year period and still be exempt, provided I have moved all my belongings out, changed my voting enrolment etc?
Yes you will be truly absent then because you actually have another home elsewhere

Records. Keep a record of the date you changed the address on your license and the electoral roll. You should receive some dated correspondence from them. Also, evidence that while the utilities remained in your name they were actually mailed to the address where you are living not the old house.

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