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My wife (67) and I (73) jointly have three properties in NSW. They are as follows:
One is our principal place of residence. We have owned it for 20 years and it has appreciated by $2 million
Another, which is an AirBNB since 4 years, was constructed after 2 years of owning the land. We have not lived in this property. It has consistently generated a net income of $30k pa – 100% distributed to my wife. Four years ago, ATO ruled that we cannot transfer the property into a SMSF because it is not a business
The third property was purchased off the plan. It is currently under construction. It has appreciated $125k since signing the contract two years ago. 10% deposit has been paid. Balance is to be paid on completion in first half of 2026
I would like to know the best way to structure the sale of one or both of the investment properties within the next two years? How long do we need to live in the third place to minimize tax? When should we sell the second and third property to minimize tax? Are we eligible for a $500k sub-cap on the second property?
The property is held in my wife and my name. The tax returns are in the name of our partnership. As the revenue is under $75k pa, it is not registered for GST. ATO ruling said that it does not qualify as a business.
I understand businesses can increase the cost base by $500k if the business has been in operation for less than 15 years. According to a newspaper article this is referred to as sub cap
Answer
If we accept that the $500k sub-cap you have read about is the small business retirement exemption life time cap which you would only apply if you owned the property for less than 15 years. Then we can disregard this, you do not qualify as a small business for the purpose of these concessions because you are earning rent income on Property 2.
Now I think that you are looking at arrangements where you cover a property that you sell with your main residence exemption, possibly exposing property 1 to CGT but never selling in your life time. Without the actual capital gains amount for each property it is not possible to set out an exact strategy but I can explain your options.
It appears you want property 1 to be your forever home but would like to see if Property 3 is more suitable for retirement living. This could result in property 1 becoming partially exposed to CGT. I recommend that you change the ownership from joint tenants to tenants in common on property 1. This will not trigger CGT or stamp duty if the ownership is still 50:50. People often do this when separating so it should not be too much trouble to organise. The reason I want you to do this is because section 128-15 (the reset of the deceased’s home to a cost base of market value on death) only applies if you inherit a property, not receive half by way of survivorship, which is the case under joint tenancy. I am trying to reduce the tax consequences if we do expose Property 1 to CGT and it does become your forever home then one of you dies and the survivor has to sell the house or can’t cover it with their main residence exemption up to their date of death. If the survivor has inherited half of the property from their spouse and it was the home of that spouse at date of their death, at least half of the property gets to reset the cost base to market value. If the survivor receives it as a joint tenant they step into the deceased’s shoes with the CGT exposure remaining because the cost base is not reset. Here is a blog that explains this in more detail, look at the Harley and Rose example. https://www.bantacs.com.au/Jblog/death-cgt-and-your-home/#more-1375 I say this because I am considering changing your main residence exemption to property 3 when it settles up to time of sale. But more about that later.
Property 2. Moving into that is only going to allow you to cover it with your main residence exemption for the time you live there and for up to 6 years after you move out. If you want to sell it with in the next two years then you will not get the 10 years ownership period up, to be allowed a downsizer contribution into super, not that that contribution is tax deductible. Moving in to property 2 is not going to make a lot of difference to the CGT payable or increase what you can put into the lovely tax free super environment. So this is the property you may need to plan to pay CGT on, hopefully not too much gain in only 8 years and hopefully you can qualify to make contributions to superannuation to offset it. Though this needs to be reconsidered when you work out just how much the capital gain is. You will need advice on your circumstances at the time, regarding the super contributions that you may be able to make. For example the work test. Also consider once you reach 75 it is going to be very difficult for you to get any money into super. Before you sell property 2 you need a financial plan to make the most of your superannuation opportunities and not fall into any traps. This is probably better done sooner than later because your options are running out. The planner will need a lot more information about your circumstances. Good record keeping of any cost base records in the attached spreadsheet will also help, but the only real trick for you is superannuation and time is starting to run out on that.
I don’t know what the gain is on property 2. I am guessing that your main residence exemption is more useful on property 3 due to the long contract date creating a capital gain yet you only have to live there for the ownership period (settlement date to settlement date) to cover it fully with your main residence exemption. I attach some spreadsheets to help you calculate the real gain on both properties and make an informed choice. As stated above moving your main residence to property 2 is only go to cover it going forward where as with property 3 you can cover the gain made already during the contract period. Certainly once you have the spreadsheets completed it is worth having an accountant review them and consider your options.
The strategy that you could consider.
Exposing property 1 to CGT by moving into property 3. Now of course you are going to be worried about that $2mil gain. There are a couple of options here.
- Rent out property 1 while living in property 3. If up until that point in time property 1 was fully covered by your main residence exemption section 118-192 ITAA 1997 will reset the cost base of property 1 to the market value at this point in time. Locking in the $2mil gain as tax free.
- If the thought of renting out property 1 gives you the horrors then you could take the risk of trying to make sure when you die that Property 1 is covered by your main residence exemption so that section 128-15 ITAA resets its cost base in the hands of your heirs to market value at the date of your death. Consider the Harley and Rose example.
- Section 118-140 ITAA 1997 provides the opportunity to cover both property 1 and property 3 with your main residence exemption for 6 months, here is a link to the section so you can make sure you organise your circumstances to fit. https://www.ato.gov.au/law/view/document?docid=PAC/19970038/118-140
Ideally you move into property 3 at settlement. It appears that your two year plan to sell ends when Property 3 is likely to be completed. You need to move in there and live there for at least 3 months, the longer the better but of course more than 6 months and you have a gap where you can only cover one property. Keep records of your change of address on licence and electoral roll, electricity bills and other mail sent there. Genuinely live there, move in personal affects. The ATO will also be very particular about your intentions in living there ie not just for tax purposes. It would be better if you lived property 3 and then decided it was not suitable so moved back to property 1. You don’t want the ATO branding the whole arrangement as a tax scheme.
The key here is the main residence period is the ownership period, not the CGT event period so we are looking at the settlement date on buying and selling the property. So it is very easy for you to cover property 3 with your main residence exemption for the full period of ownership.
I attach some spreadsheets from the Getting Your Affairs in Order Package that will help you keep the financial records for your executor. All this careful planning could be wasted if you don’t leave clear instructions about this strategy, dates etc.
Note that if you don’t reset the cost base on property 1 by renting it out and if you live in property 3 for more than 6 months before it is sold then property 1 is exposed to CGT. If there is a gap Property 1 will be exposed to CGT if it is not covered by your main residence exemption when you die or if you end up having to sell it within your life time. The CGT calculation will go right back to the day you purchased property 1, you will need all those records kept. The percentage of the gain that is taxable may be very small because it is only the number of days that it was not covered by your main residence exemption as a percentage of total days of ownership, that is taxable. It is the record keeping!
I want to stress that this is only food for thought you need more specific advice by someone with a detailed understanding of your full circumstances and preferences and the numbers in the spreadsheets.
