Strategy: Choosing which property to apply the Main Residence CGT exemption on

Strategy: Choosing which property to apply the Main Residence CGT exemption on

Imagine if a person owned several properties and had the choice of which one to apply the main residence CGT exemption to. Wouldn’t it be good to save tax by choosing the one with the highest gain to be the one that is exempt from tax?

Well that can be possible to do – to a degree.

The strategy is to live in each property at purchase and establish it as the main residence before moving out onto the next property. Provided one of the properties is sold before 6 years is up after moving out from the first one, and provided that all other exemption requirements are met, then it could be possible to choose one of them as the main residence at the time of the first sale.


Example
Bart has 12 properties. When he bought each of them he lived in the property as his main residence for 6 months before moving out and into the next one.

Bart now wants to sell one property.
He decides to sell property number 2, so he now has the option of deciding to use the 6 year absence rule to sell this one without triggering any CGT (it has been less than 6 years since he moved out). It was his main residence and all other requirements are met (resident, under 2 hectares, wasn’t income producing while living in it etc).

But before Bart does he wants to consider whether he should be claiming the exemption on this property and not another.

If IP2 has a $200,000 capital gain and next year he plans to sell IP4 which has a $400,000 capital gain then he might be better off not claiming IP2 as the main residence but to claim IP4 as he would probably save more tax.

Only one property can be claimed as the main residence for any one period, but the choice only has to be made on the sale of one of the properties. In Bart’s case above he has 12 properties which could potentially be sold without CGT, but only 1 of these properties could actually be claimed as the main residence. Because if he were to claim the main residence exemption on 1 then the other properties could not be claimed as the main residence.

 

Oh the moving costs! Hope he has a PO Box for his mail.

 

Bart would therafter have a problem. Most of his properties he resided in for an initial 6 months are no longer CGT exempt for that 6 month period as his choice to use the exemption means NO other property can become a main residence at the same time. Note too that the property he choose as exempt must have been his principal place of residence within 6 years of him leaving it.

Also Bart should also consider his partners main residence (defacto, wife, same sex partner etc) at the same time. Barts choice may be binding on the partner or render Bart with a problem. Partners / Family cannot each have a different main residence without a CGT issue. The Main Residence exemption is binding on a family not just the owner.

And finally Bart may not have the same degree of flexibility for land tax with so many IPs. His principal place of residence is factually determined rather than a choice.

 

This Bart is not the same Bart as my other examples - Bart is single in this example.

Bart would not have a problem because he knows can only only have one main residence for any overlapping period is probably going to choose the property with the highest gain to be his main residence.

his only problem is the frequencey of his moving house.

 

Maybe you could use Bort instead?

I am doing this same strategy... my Adelaide house I bought is on > 2ha so not fully CGT exempt, so I have left Sydney former PPOR as primary residence for now, which also assists with land tax in NSW. It has had massive capital gain as I bought it before the 2013 boom, so future CGT also a consideration.

 

Yes you would expect the sydney one to grow more than the SA probably.

But if it is rented out this won't help with land tax unfortunately.

 

Yes its rented out

 

In that case the PPOR exemption for land tax can only be claimed for a max of 6 months.

 

Yep am considering when to sell

 

Another way this could happen is that two people with their own PPOR's could marry/partner. Each has been in their own PPOR for 6 months+. After becoming tied p) they have to decide which property is their PPOR, even if they only live in one of them fulltime.

 

I've got a strategy in the pipeline on something similar.

 

@Terry_w

Good points

My question is a person with that many properties could be considered to do property investment as a source of income.

I am not sure if there is a big difference in tax rate but why can he not sell the property and pay income tax ( hopefully he has some negative gearing that year too) rather than capital gains tax?

 

Not sure what you mean Tenex?

If properties are held on revenue account they would be taxed as income with no 50% CGT discount.

The differences can be substantial
Tax Tip 157: Difference on being taxed Capital v Revenue Account Tax Tip 157: Difference on being taxed Capital v Revenue Account

 

My son is also named Bort.

 

@Terry_w

There are a few problems with claiming CGT as opposed to normal income tax in that CGT has a criteria that must be met AND what if in your example above you pick a property for CGT discount only to realize you should have picked another one later on.

With income tax on the other hand there is no criteria and more importantly if the property is jointly owned you can split the income to remain in lower brackets And also use things such as negative grearing to further lower your taxes.

Correct me if I am wrong but with CGT you cannot claim any losses or GST right?

 

Yes some people may later regret claiming the main residence exemption on property A and not property B. This is known as "main residence regret". I don't see this as a problem with claiming CGT though.

GST is not claimable on residential property unless the owner is conducted an enterprise and some other requirements met.

Losses can be 'claimed'. Both capital losses and income losses can be used to reduce CGT.

 

Makes sense, I think I had mixed up the CGT exemption and the 50% discount on CGT that you get for holding the property for a period of time before selling which are entirely different.

Out of interest, what would be the best way to reach you?

 

Was there any reason Bart lived in each of them for 6 months? Would his full CGT exemption for his main residence still be applicable if he moved in for say 2 weeks or a month instead?

 

No that was just a number plucked out of the air for the example.

There is no minimum legislated time period, but more is required than just moving in

 

Does main residence CGT exemption applies only one time in a life or can be claimed many main residence exemptions over the years? if yes, what should be gap in terms of years prior to nominating other property as main residence. I did not understand the meaning of overlap years when it comes to 6 year rule