Main Residence Exemption, choose carefully

Capital Gains Tax (“CGT”) applies to the capital gain made when land and buildings are sold by a taxpayer, unless you can use the main residence exemption.

In simple terms the capital gains is the difference between the sales price (net of selling costs) and the cost price (plus stamp duty, legals and the costs of acquisition).

You can be exempt from the tax where the property sold is your nominated “main residence”. Usually you are only entitled to nominate 1 property at a time as your “main residence”.  There are some provisions which allow you to have 2 nominated properties for a 6 month changeover period, but I will ignore these for now.

If for a period you own two properties that could be regarded as your main residence, you must choose one of the homes for this exemption and CGT will apply to the other property. You don’t have to make the choice until you sell one of the homes. If you make this choice, you cannot treat any other dwelling as your main residence for that period.  Also, to qualify for a full CGT exemption, the property can only be treated as your main residence from the date that you move into the property.

If you move out of the property and rent it out, you can continue to claim an exemption from CGT for up to six years after you move out (6 years rule) provided that you do not nominate another main residence.

The tax is calculated on the number of days that the property did not qualify as your main residence.

Let’s assume that you acquired and moved into your Collingwood property in 2009; the property could have been your main residence from that date. You moved out in 2010 and rented out the Collingwood property from 2010 to March 2014 when it was sold.  From 2010 to December 2012 you lived in rented accommodation. In December 2012 you bought a property in Carlton because they have a better football team. When you sold the Collingwood house you could still treat the property as your main residence because the period that it was rented out is less than 6 years after you left.  So for the entire periods from 2009 to 2014 there would be no period where Collingwood was not your main residence and (as the tax is worked out on the period when the property was not your main residence) there would be no CGT to pay.

As you can only have one main residence at a time, Carlton would not be your main residence from December 2012 (when you moved into it) to March 2014, but would be after that date.  So if you sell the Carlton house in the future, Capital Gain Tax will apply to the profit made on sale for the period from December 2012 up until March 2014 when it became you principal residence – after the sale of Collingwood.

Alternatively, you could nominate the Carlton property as your main residence from December 2012 in which case any profit on an eventual sale will be CGT free, but you will pay CGT on the profit made on Collingwood but on a pro-rata basis for the number of days that it was not your main residence, namely December 2012 to March 2014. You will need to have obtained a market valuation when the property first became available for rent (2010). This value will be deemed to be your cost base and the pro-rata calculation will be commence from that date.

The decision which way you go will be influenced by the potential for a substantial capital gain on each property.  You will need to do the arithmetic.

If you need some help with claiming this exemption, just give us a call on (03) 9585 7555 or email Noel

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