Help: Main Residence Exemption (Marriage)

I currently have my investment property that would be deemed as my main residence after living in it for 6 months. I have since moved out and am living with parents (main residence is under 6 years).

I'm now engaged and so am looking for a new PPOR.

I'm trying to work out how to best structure the loan and purchase. I think I have it right, but I just need some more confirmation that I'm doing the right thing.

The plan is to:
- Purchase the property now in my fiance's name prior to marriage
- Sell my investment property in a years time (such that it settles prior to getting married)

The aim is to avoid paying any CGT on sale of the property. However, if there's a possibility to keep the property beyond marriage and avoid CGT, I'd much prefer to do so.

My understanding is that you can't have any overlapping main residences and so purchasing in her name prior to marriage will mean that it remains exempt until marriage.

Looking forward to hearing what you guys think.

 

You need legal advice on the structure. Considered the risks of getting it on your spouse's name for example?

You can have overlapping main residences but you could only count one of them as the main residence between you and the spouse.

A partner can be a spouse well before marriage too.

 

Thanks Terry. For clarity, we live separately and are both independent (and financially independent) from each other. Does that make a difference?

So if my IP is currently solely in my name, we could buy our PPOR in joint names therefore being considered a shared main residence between us and therefore is also exempt from CGT (meaning I effectively have my IP exempt from CGT for up to 6 years, as well as on the new PPOR)?

 

You could still be spouses even if living separately. You would need to look at the definition of 'spouse' in the tax act to be sure.

Yes

 

I'm not sure that it makes sense to only hold CGT exempt investments. You are only paying CGT on the gain.... Noting the calculations or valuation needed post the 6 year period.

 

@Terry_w said yes but not sure what to. If both free of CGT i dont agree, i hate this section of the Act.

you wont get a CGT exemption on both properties. Section 118-170 is the section. its not easy to read to be honest.

so break it down

118-170 (1) If, during a period, a *dwelling is your main residence and another *dwelling is the main residence of your *spouse (except a spouse living permanently separately and apart from you), you and your spouse must either:

in your case you have a dwelling that is your main residence (the IP you previously lived in and it continues to be your main residence under the absence provisions - yes I know you live in another "main residence" but the old IP is your main residence for tax purposes as you made the election.

and another dwelling is the main residence of your spouse. ok that applies as the property you are both living in will be her main residence for tax purposes.

so next

(a) choose one of the dwellings as the main residence of both of you for the period; or

(b) nominate the different dwellings as your main residences for the period.

in your question above you are doing b nominating two different dwellings.

so next

118-170(2) If you nominate the different *dwellings as your main residences for the period, you split the exemption in accordance with subsections (3) and (4).

ok so need to split the exemption

118-170(3) If your interest in the *dwelling you chose was not, during the period, more than half of the total interests in the dwelling, the dwelling is taken to have been your main residence during the period. Otherwise, the dwelling is taken to have been your main residence for half of the period.

ok so you have chosen the old IP that is your interest in the dwelling. your interest in that dwelling is more than 50%. you own 100%. it says if your interest in the dwelling you chose was not more than half of the total interest then it is taken to have been your main residence during that period. but you own 100% so only half of the ownership period is counted for main residence days.

so you will be subject to partial CGT on the sale of the old IP that you have elected to continue to be your main residence.

but it gets worse

118-170(4) If your *spouse's interest in the *dwelling your spouse chose was not, during the period, more than half of the total interests in the dwelling, the dwelling is taken to have been your spouse's main residence during the period. Otherwise, the dwelling is taken to have been your spouse's main residence for half of the period.

your spouse has 100% interest in the new dwelling her main residence. so she will be also be taken to only get the main residence exemption for half of the ownership period.

you will both be subject to partial CGT on both properties. it will end up a very messy calculation. haven't even factored in third element costs in the calculation which will reduce the potential capital gain but that just makes it messier.

if you have made a reasonable gain on the property that was an IP why not elect it for it stop being your main residence up to the date you buy your new PPOR.

you will need to do some tax planning. if you stop the property being your main residence from the day you move into your new property it will then be subject to partial CGT but if you dont hold it for too long it might well be worth it. might be better than losing 50% of the main residence exemption and having your wife also subject to CGT when she sells the new property.

 

My yes was to this.

Either property could be classed as the main residence but not both for overlapping periods after becoming spouses.

 

The former main residence may not be exempt from CGT. The original post regarding this seems to have been missed.

1. Was the property you home from the date acquired for that first six months ? If so, s118-192 applies and its market value on the date it produces income will determine its costbase that may be subject to future CGT and or exemptions. In which case the 6 year absence rule may apply up to time you have a spouse and then a choice must be made (later when a sale occurs)

2. Or was the property an IP initially and you have also now lived there for 6 months and seek to return it to being an IP ? The use of the expression your IP and now a PPOR is contradictory. A property can never be both. It can be a former XX and a current XY.

If so, It would be subject to pro-rata CGT AND the 6 year absence rule. (Assume that the spouse doesnt buy and occupy the new property in next year)

1. The period between ownership and the date you commenced to occupy is a taxable period.
2. The period after you occupy and thereafter for UP TO 6 years may be either 50% or 100% exempt for all days until sold (or some of the days as Mike has explained).

Importantly the total CGT gain has to be calculated since its NOT what you probably think it will be before it is apportioned. Here is a quick calc method.
1. Original cost incl all acquisition costs
2. All ownership costs for the 6 months (when you couldnt claim a deduction) ie non-deductible costs like rates, interest etc
3. Deduct all QS deductions you have claimed to reduce the costbase
4. Add selling costs

So take the total ownership period and pro-rata between taxable days (days rented) and exempt days (6mth + period after that date) and apply that % to the total gain. Then halve it. Thats the profit that would be taxable. If any.

If retained other issues occur as the 6 year absence rule and spouse rule may both limit the exemptions available to be chosen at a later date. Also land tax needs to be considered

 

Thank you all for the detailed explanation. It's all still very confusing.

To clarify:
- We don't live together and are completely independent.

Property X
- Purchased in December 2016
- moved in immediately for 6 months
- After 6 months, rented it out
- There's no intention to live in this property again.
- I own this solely

Property Y
- Still under consideration but looking to purchase within the next 6 months
- Once settled, either of us can move in immediately
- We plan to marry in February 2019
- Still trying to work out whether it's better to buy in joint names, her name or under mine.

Once we buy property Y and are married, it sounds like the cost base will be market rate at the time. Is the market rate the price at the time I moved out, or is it the day we are married? She's also on the highest marginal tax rate and so I would want to minimise the tax paid if there's any implications on sale of Property X.

I'm happy to sell or hold Property X depending on what the cost base is. If it's subject to significant CGT, then it may be better to sell it before marriage.

 

give Paul a call as you might be able to work through many of those issues in the one hour free consultation. it might be worth making that call and working through the issues.

At least you know how it might be treated and he can do some scenario analysis and tax projections for you with the different scenarios. that wont be free i suspect.

 

No. It would be based on its cost