Ask Ban Tacs Question
I owned and resided in two apartments that had been joined together and when the building was built . It was two titles and were not capable of being sold individually at the time I moved to a retirement complex . I lived in the apartment for 4 years . When I moved I rented them for 12 months (not as individual apartments) then they were vacant for 9 months whilst I tried to sell them as one large apartment (unsuccessfully) . I then reconfigured them into two apartments (had to build a new bedroom , bathroom ‘ block doorways etc soundproof). I sold them individually about 6 months after I ceased renting them . I believe that I can claim them as my principal place of residence and not claim my current leased residence as my PPOR until the last apartment is sold .
Answer
You are correct that you can choose to cover, with your main residence exemption, a different residence than the one you are living in, if you have previously lived in the residence you choose to cover and your absence is less than 6 years if it is earning income, the period you can cover it while it is not earning income is infinite. Section 118-145.
The trap is you can only cover one dwelling at a time with your main residence exemption. Two units lived in the way you describe can be considered one dwelling and fully covered with your main residence exemption but only if they are sold to the same person on the same day. Unfortunately your situation is a case of two dwellings being sold. You certainly have the right to choose which of these you cover with your main residence exemption but only one.
Now let’s look at the CGT liability. Section 118-192 allows you to reset the cost base of a dwelling to its market value when you first rented the property out if up until that date it would have been covered by your main residence exemption had you sold it. Let’s look at the exact words of the legislation:
118-192(1)
There is a special rule if:
(a) you would get only a partial exemption under this Subdivision for a *CGT event happening in relation to a *dwelling or your *ownership interest in it because the dwelling was used for the *purpose of producing assessable income during your *ownership period; and
(aa) that use occurred for the first time after 7.30 pm, by legal time in the Australian Capital Territory, on 20 August 1996; and
(b) you would have got a full exemption under this Subdivision if the CGT event had happened just before the first time (the income time) it was used for that purpose during your ownership period.
118-192(2)
You are taken to have *acquired the *dwelling or your *ownership interest at the income time for its *market value at that time
Now there was a time when I would have thought this section would have helped you by at least resetting the first element of the cost base of the one you don’t cover with your main residence exemption to the value when it was first rented out which would have considerably reduced your capital gain but this might not be the case. See how at the start it says “if you would only get a partial exemption under this subdivision for a CGT event happening in relation to a dwelling” The CGT event is looking to the future, the sale of the dwelling and asking if it wasn’t for the concession offered by this subsection would you only get a partial exemption. Well if it wasn’t for this concession you would have got no concession at all because there is no main residence coverage allowed on the property (because you have used it on the other apartment) at the time of the CGT event ie the time you sell. It was technically fully covered by your main residence exemption when you first rented it out so you cross over the line to get the reset. The fact you have sold them separately allows the ATO to go back and renege on the reset. Was this an intended outcome of the legislation? If the ATO considers that it was not intended then they sometimes allow people to treat the situation differently to the literal meaning. It may be worth a ruling request and I would be really interested to hear what they say.
Now going forward assuming no section 118-192 then you need to calculate the CGT on the apartment you do not cover with your main residence exemption. Of course there will be a portion (approximately half) of the original purchase price and costs to buy as the first element of the cost base. You can then of course increase this by that apartment’s share of the cost of the renovations and selling. Section 110-25(4) also allows you to increase your cost base by absolutely anything associated with the apartment that you haven’t already claimed as a tax deduction. So have a look at anything for the period you lived there and when it was vacant. This could be light globes, cleaning materials, insurance, rates, interest etc. You cannot use section 110-25(4) to create a capital loss but it is certainly worth digging and digging until you eliminate your capital gain.
Please make sure once you dig up as much information as you can that you get an Accountant to go over the calculation as they will have the advantage, unlike me, of knowing all your circumstances.
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