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Dear Julia. Hope you are well
My wife (68) and I (74) have four properties in NSW as follows. The primary residence (Property 1) is a 5 bedroom house, worth about $3m. The other three (Property 2, 3 & 4) are small off the plan purchases and worth under $1m. I retired in March 25. My wife has a non-curable bile duct cancer for the last 3 years. Her life is being extended with a clinical trial drug. We have 2 doctor children and 5 grandchildren under 5 years age.
Property 1 is our primary residence in Wahroonga (Sydney) for 22 years. It is a joint tenancy & has appreciated by $2m.
Property 2 was purchased off the plan in April 2022 for $525k with a 10% deposit. The balance is to be paid on completion in early 2026. It is a small 1.5 bedroom Gosford apartment, 40 minutes from the Wahroonga house, on the 16th floor. It is a joint tenancy, currently under construction and has appreciated by $125k since signing the contract. It is intended to be a downsized primary residence initially on a trial basis. If not suitable, it is shall be sold and we would move back to Property 1.
Property 3 was purchased off the plan in September 2024 for $700k with a 5% deposit. The balance is to be paid on completion in early 2026. It is a small 1.5 bedroom Gosford apartment on the 19th floor directly above Property 2 in the same building. It is a joint tenancy, currently under construction and has not appreciated since signing the contract. It is intended to be a holiday home for children and grandchildren.
Property 4 was purchased off the plan in May 2024 for $785k with a 10% deposit. The balance is to be paid on completion in late 2027. It is a small 1 bedroom apartment on the 5th floor near Property 1. It is a joint tenancy, currently under construction and has appreciated about $100k since signing the contract. It is intended to move into this apartment after returning to Property 1 if Property 2 is not suitable. Otherwise it shall be sold.
I would like to know how to structure the movements between the properties and possible sales of one or more of the properties. To minimize taxes, is it sufficient to live in Property 2 for just 3 months if it is not suitable as our primary residence? While we are living in Property 2, do we have the option to retain or rent out Property 1? If not rented, can electricity supply be in our names for both Property 1 & 2 during the period Property 1 is our primary residence? Is there anything we can do to minimize taxes on Properties 3 & 4? Given the prognosis of my wife’s health, is it desirable to change joint tenancies to tenants in common for all four properties ?
Answer
Reading you question I started to think of twists, turns and tricks but then thought you have enough on your plate without tax minimisation running your life. The catch is for any of these strategies to work you are going to have to move into the properties and make them your home. Here are the key sections you could utilise:
Section 118-145 ITAA 1997 https://www.ato.gov.au/law/view/document?DocID=PAC%2F19970038%2F118-145&PiT=99991231235958
Allows you to cover a property that has previously been your home with your main residence for up to 6 years if you move out and rent it out or an infinite period if it is not earning income. You do not have to decide if you are going to utilise this section until you decide to sell the property.
Section 118-192 ITAA 1997 https://www.ato.gov.au/law/view/document?docid=PAC/19970038/118-192
Resets the first element of the cost base of a property to its market value when it is first used to produce income. I am assuming property 1 has never produced income so this might be useful to lock in the main residence exemption on the capital gain to date if you use a different scenario to the one below.
Section 128-15 ITAA 1997 https://www.ato.gov.au/law/view/document?docid=PAC/19970038/128-15
It is important to note this section does not apply to properties owned as joint tenants. As a joint tenant there is no reset to market value, the survivor just steps into the shoes of the deceased and is considered to have used the property in the same way as the deceased. Where as tenants in common allows the beneficiary to start a fresh on that half of the house with market value and deemed to have acquired it at DOD. Obviously, if the property has always been covered by the deceased main residence exemption in makes no difference whether joint tenants or tenants in common, unless the survivor is a non resident of Australia for tax purposes when they die or sell the property. Changing from joint tenants to tenants in common will not trigger CGT as long as the ratio remains equal ie 50:50. I cannot advise on any stamp duty ramifications.
Now I suppose at the end of all this you are expecting a clear guide on some clever tricks. If we get too clever the ATO might not consider you to have genuinely established your main residence exemption in the off the plan units. So just to relate to the scenarios you see as possibilities that seem to me to be a normal retirement arrangement rather than minimising tax.
You move from property 1 into property 2 when it is completed. Section 118-140 gives you the opportunity to cover two properties with your main residence exemption for up to 6 months though there are some pretty strict rules. Section 118-135 only requires you to move into a home as soon as practical after settlement to be able to cover the property with your main residence exemption. Even though in this case you benefit from the capital growth from the time you signed the contracts to buy. You may have heard that the CGT event happens when you sign the contract to purchase. But when the legislation uses the words ownership interest it is talking about settlement date. So all you have to do is cover property 2 with your main residence exemption from settlement date to date of sale to be able to cover the capital gain from back in 2022 with your main residence exemption. You could live in property 2 for 3 months to decide then put property 1 or 2 on the market depending on what you decide. But you will have to sell either property 1 or 2 within 6 months of settling on property 2 to effectively cover both properties with your main residence exemption under section 118-140.
Later when property 4 becomes available you might want to do the same thing but consider that could look contrived. You would have to have a valid reason for moving in and out of property 4. Or maybe you do move into property 4 on settlement and put property 1 on the market. That would be because you decided you didn’t like living on the Central Coast so returned to property 1 and waited until property 4 was completed to downsize. If you move into property 4 as soon as it is finished and sell property 1 within 6 months property 1 will be tax free yet property 4 can still be fully covered by your main resident exemption too.
This only leaves property 3 exposed to CGT. Changing from joint tenants to tenants in common has some benefit when a property has been exposed to CGT but it is the home of the owner when they die, refer section 128-15. In the scenario we are discussing you have sold off property 2 and property 1 so far full covered with your main residence exemption and are living in property 4 right from the start of your ownership period. Maybe you eventually end up back at Gosford because your family moves there and you need their help much later in life. You could sell property 4 tax free then move to property 3 changing it to tenants in common so that when one of you dies the survivor inherits half the property with a reset to a cost base of market value at DOD. When the survivor dies it will get another reset, of 100% of the unit when passed onto your heirs if property 3 is still the survivors home. Which it can be under section 118-145 even if the survivor has moved into care. Effectively giving you the capital gains on all 4 properties tax free.
