Ask Ban Tacs Question
Hi
Structuring of our loan and title in which name
We have recently bought a home which we plan to live in 6 months and then rent for 5 years and then knock down and build and live in next 20 years and treat as our main residence (using the 6 year exemption rule).
My husband is running a consulting business through his discretionary trust (corporate trustee and he is the sole director) All our investment properties are in a 2nd discretionary trust with myself as the individual trustee.
We would like to be eligible for the main resident exemption for the home we plan to build, hence was considering the options available:
1. Joint names hubby and me
Hubby is concern with potential any litigation relating to his business, creditors may access to our family home. Loan will be under joint names.
2. Title under my name only, but the loan with the bank will be under joint names.
Q1 When we go to sell in 20 years would we be eligible for the main residence exemption regardless if option 1 or 2 is used, given we meet the 6 year rule?
Q2 Do you know of an arrangement we can get our bank or solicitor to set up to asset protect our family home in case of any potential litigation from my hubby’s business if title is is in joint names.
Another option we are thinking is to have the title in joint/my name only and do the following:
Q3. Rent it out intially for 3 years and then rebuild and live in it. How do we calulate CGT on the family home. Do we reset the cost base from the time we move in to live and calculate the CGT on the difference between acquistion price and market price at time we move it? If house pices stay the same or fall during this time do we claim a capital loss. Or do we need to use the apportion method i.e after 20 years, say house price gone up $600K, we have to apportion 3/20 years as taxable Capital gain with 50% discount.
Thanks for your help.
Answer
Due to the introduction of section 118-147 there is now some doubt as to whether you can link your main residence exemption between two properties when the first is demolished, unless you are utilising the 6 year rule or section 118-150. What this means is that if you move back into the property before the demolition and rebuild then make sure you move into the new property for at least 3 months and immediately after completion to avoid a possible trap because of poorly drafted law.
Note the 6 year rule (section 118-145) only counts in the 6 years the time the property was used to produce income. If you are absent from the property and it is not producing income the period of time you can cover it with your main residence exemption is infinite. So don’t worry if it takes more than a year to construct the new home. But you do need to have finished the construction and have moved back into the property within 4 years of the last occupant moving out because you will need to utilise section 118-150 to link the old and new dwelling.
It is ok for the title to be in your name only, still full main residence exemption, but note that this will deprive your husband of any negative gearing benefits while it is rented out. If it is negatively geared? Names on loans should not matter but if you want to be cautious you could have the loan in joint names but have a loan document in place that your husband on lends his half to you. I am not recommending this though, because such an on lend arrangement is not a good asset protection strategy.
Q1) Yes if you have followed all of the above
Q2) Yes, but it would be simpler (and works fine for the main residence exemption) to just have the property in your name. Only down side to consider is the negative gearing benefits. If you really want to have it in joint names consider a mortgage trust. As you have asked more questions than permitted the cheapest way of finding out more about this is purchasing my book (shopping section of the web site) and reading page 147.
Q3) Under your original plan Section 118-192 will automatically reset your cost base (not optional) to the market value at the date you first rented it out if up until that date it had been covered by your main residence exemption. But if you successfully utilise the 6 year (118-145) and 4 year (118-150) rules then the reset won’t matter because there will be no CGT anyway because it is your main residence during the whole period so exempt.
If you rent it out initially for 3 years without first moving into it you will not be able to cover it with your main residence exemption for those 3 years nor will you be able to reset the cost base. Accordingly, whatever capital gain you make over the next 20 odd years will have to be apportioned as you describe at the end of your question. A record keeping nightmare. Note you can increase the cost base of any ownership costs not claimed as a tax deduction so interest, rates, insurance, light globes, lawn mowing fuel etc while you live there will effectively reduce the CGT on the period you were not because it reduces the gain before apportionment.
Still best to move in there asap after settlement. Resetting the cost base does not apply if it was a rental first.
Remember CGT is a tax on inflation so is wealth destroying
Note this is all assuming you do not cover another property with your main residence exemption during any of the period you own this property.
