Tax Tip 165: Not all Main Residences are Exempt from CGT

Tax Tip 165: Not all Main Residences are Exempt from CGT

The main residence of a person is often fully exempt from Capital Gains Tax – but this is not always the case.


Some situations where the main residence may be taxed:

1. If you have claimed another property as the main residence for an overlapping period;


2. If you rented the property out before living in it;


3. If the property was income producing while living in it;


4. If the interest on a loan used to acquire the property could have been deductible;


5. If renting out rooms of the property;


6. If have a granny flat on it rented out;



7. Being absent for longer than 6 years and renting the property out;



8. If the property is larger than 2 Hectares;



9. If the house is demolished and vacant land sold;


10. If the construction of a dwelling on the land was not finished within 4 years of purchase of the vacant land;


11. If a house is constructed and sold without living there for 3 months;


12. If the property is owned by a company;


13. If the property is owned by a trustee;


14. If the land under the house is subdivided and sold off;


15. If a new house is constructed, land subdivided and the new house is sold off without living in it.


There are probably a few more reasons too.

 

16. Proposed laws to affect periods of non-residency will likely affect the 6yr absence exemption. Intention is that when you depart the 6 year rule will end.

17. Departing residents who become non-resident taxpayers renting their former home. Not only does the CGT exemption end after 6 years the property (all property) becomes subject to 100% CGT as there is no CGT discount applicable to that period.

18. Land / House etc INTENDED but not actually occupied as soon as practicable.

19. If there is no habitable dwelling. ie a caravan. You cant have a main residence living in a tent for example.

20. If two spouses (defacto, same sex etc) each owns a former home. They cannot each use the 6 year absence rule. If they choose to live in one dwelling they must choose which property/ies are exempt and have a combined choice of 100% between them. They may elect 50% each or pick one for the 100%.

21. A SMSF property including one that owns a farmhouse that is occupied.

22. You renovate and then do not reside in the property for a period of at least three months as soon as practicable after completion PRIOR to then selling. (ie you live in it for three months but a sale contract is made after 2.5 months)

23. Profit making intentions Refer TD 1992/135

24. Main Residence land commences to be held as trading stock or for a profit making intention. This triggers a CGT event

25. Property is not occupied. Merely moving a bed and a few belongings doesnt meet the test of a MAIN residence. The taxpayer and their family would be expected to fully occupy with belongings etc.

26. The property is one of several the taxpayer occupies. It is not their main residence. eg Nicole Kidman may have difficulty arguing her Southern Highlands property is her main residence v's her US home.

27. Conduct a business from the property - Used to produce income as noted in 3. above. It is not necessary that the business pays any of the outgoings it merely needs to satisfy the deductible interest test (hypothetical) see Item 4 above.

28. You own a home and buy another and list the former home for sale. If it sells after 6 months then the whole of that overlap period of main residence exemption is then disregarded and a pro-rata CGT issue arises on the former home UNLESS you then choose to treat the new home for that same period as taxable. In either position a pro-rata CGT issue occurs.

29. Your spouse / dependent U18 children live in a different house to yourself. You would need to choose that their home is taxable to gain exemption to your own home.

30. A co-owner of the property does not reside in it.

31. The property you live on contains a separate but adjacent parcel of land not used for the main residence. eg a 2HA property and 1HA is fenced and a separate dwelling etc etc. A common example is where a elderly person or a adult child may reside rent free on that other parcel of land. Another example may be where 1HA is for olives and no income has yet been produced.

32. You buy a old house on land. Reside in it then sell the house to The Block. The sale of the land is not subject to the main residence exemption as the dwelling was sold separately. The sale of the house (only) is CGT free.

 

But CGT only on balance over 2HA land content.

 

Yes - And you can choose which part is taxed..You would need a valuer to provide that apportionment advice based on a val of the two areas so that the costbase and the sale proceeds can be apportioned..TD 1999/67

Typically the 2HA part would be the part with residence and adjacent buildings and all useful land and where possible allow the remaining portion to cover the blackberry, rock or forestry areas which may be of lesser value.

 

Sorry Terry, simple question here (read through most of your popular 20 page thread on the 6 yr rule but couldn't quite find the answer)

How would the CGT on this overlap be calculated for a new PPOR?

1) Would a valuation need to be done at the end of the overlap to establish what the CGT portion will be at time of sale in the future

Or

2) will the value at sale be used and the formula: no. Of days not exempt (overlap) / total days owned?

Thanks for your help.

 

Val couldn't be used in that case. Would be a time based apportionment using the cost base expenses

 

Hey @Terry_w regarding your point 11 and @Paul@PFI regarding your point 22 is it correct in concept that if I
1. Purchase a property and use it as my PPoR
2. Do a knock-down rebuild of it once DA is approved.
3. I rent elsewhere while the build happens (Time between points 1 & 3 being likely 12-18 months, establishing main residence for CGT exemption status)
4. Then as soon as practicable after the build is done I move back in for a period not less than 3 months

THEN I will still be eligible for the 6 year exemption, even if I go on depreciating the brand new building after that? The main point here I am seeking to clarify is that I would need to live in this newly-built property for a minimum of 3 months post build, otherwise what I'm understanding is that it won't fit under the CGT exemption rule?


Even greater thanks for your expertise if you can confirm my understanding that a knock down rebuild likely meets the definition of a new property as outlined in s40-75 of 'A New Tax System (Goods and Services Tax) Act 1999', thus per 'Treasury Laws Amendment (Housing Tax Integrity) Bill 2017' I can treat it as my PPoR when I live in it post-build for the 3 months, and also claim div40 depreciation on the new-build assets once I move out.


Tax ix cool.

 

You could not depreciate brand new assets if you a living in the property. if you moved in and out and rented it those assets would no longer be new assets.

If you don't live in it for 3 months it can't count as your main residence during the construction period.

 

Hey Terry, my understanding is that if you purchased a brand new property (E.g. off the plan apartment), lived in it for a few months THEN rented it out you would still be able to claim div40 & div43 depreciation. This is because the asset was owned by you at the date of original supply. This also applies to buildings that have been through 'Substantial renovations' or buildings built to replace demolished buildings per the GST Act 1999.

https://www.ato.gov.au/law/view/pri...1231235958&Life=10010101000001-99991231235959

The following section of ITAA97 is post the Housing Tax Integrity Bill 2017 amendments and appears to spell this understanding out to my amateur reading - am I mistaken?
INCOME TAX ASSESSMENT ACT 1997 - SECT 40.27 Further reduction of deduction for second-hand assets in residential property
(4) Paragraph (2)(c) does not apply to you for the asset if:

(a) the *residential premises referred to in paragraph (2)(a) (the current premises) are supplied to you as new residential premises on a particular day (the current supply day); and



My understanding of the intent of these changed rules was to stop people renovating and flipping properties as the tax benefits to the final purchaser aren't available, however for substantial renovations and new builds which contribute to stimulating the economy they would still allow the deductions of the assets the acquirer got as new, even if they lived in the property first.


Of course as you mentioned the property has to be used to produce assessable income for deductions to be allowed, i.e. rented out, not while somebody is living there.

 

what about ss(4)(d)?
(d) at any earlier time, no entity was residing in any residential premises in which the asset was used, or installed ready for use, at that earlier time; and

 

You know what Terry you got me, thank you.

Now I need to work out if I'm better off living in the property post-build and wrapping it up in the 6 year CGT exemption period without being able to claim div40 depreciation, or if i'm better off renting it out as soon as it is built and taking the improved cashflow in the short term, dealing with the lack of CGT exemption later.

Do you have a tax tip on the CGT treatment of the new building if I did a knock down rebuild and immediately rented it out on completion, where the original land was under the 6 year rule?

 

What is the CGT treatment of the new building if I did a knock down rebuild and immediately rented it out on completion, where the original land was under the 6 year rule?

The CGT exemption for a new build allows the exemption to "backdate" but it comes with a 3 month catch that means you lose Div 40 however if you vacate, demo, construct and then lease it there is no CGT main residence exemption available from the date you vacate. But you can claim Div 40 and 43.

The former exemption STOPS on the date you vacate as the land cant be a dwelling and is irrelevant for the main residence exemption. You cant be absent if you are rebuilding. The HOME is the dwelling and it just happens to sit on land.

There also may be benefits to leasing the former home before vacating it (say 6 months later) for demo. When a taxpayer demolishes a Div 43 asset used to produce income and replaces it with a nother that will produce income then a scrapping deduction could be available on the old dwelling. A QS report may assist.

 

Thank you @Paul@PFI that's hugely valuable. BMT are now on my list to call tomorrow! Though I suspect with the age of the building I'm not giving up much, not enough for the hassle of trying to switch purposes around, muddy the 'was it a PPoR' waters and have to deal with moving more than we have to.

Living in it 3 months post build will be nice, will give us a chance to thoroughly check the build for any issues at the start of its warranty and I'm hoping the next few years of global vaccine roll-out and economic confidence lifting bring more juicy capital gains for me to enjoy the CGT exemption on, making it the greater financial good as well!

@Paul@PFI & @Terry_w you've both given some fantastic relevant advice that's cleared up some impactful stuff for me. I'd love to show my appreciation with a charitable donation on each of your behalves to pay it forward. Any preferences?

Thank you, very much.

 

Theree months wont fly for Div 40. There is a incidental occupancy rule but first home buyers will NEVER meet that and also comply with the first home buyer concessions. Dont forget the "lost" Div 40 isnt lost...it is deferred until you sell in most cases. Or when a specific Div 40 is later replaced. eg Oven is replaced in 5 years. A CGT loss for the oven "cost" can be recognised.

The Gerrard COVID holiday escape Foundation accepts all generous donations. Gifts over $2 are not deductible. Keep your money and remember who the good broker / solicitor and tax agents are.

 

Understand RE div40 and 3 months, and that it's ultimately not lost. Though in the accumulation phase of life I'd rather recognise the depreciation expense as a cashflow rather than as a lump-sum benefit later on when it will be less impactful for me. I'll choose to enjoy life in a new house for 3 months and not worry about div40 depreciation.

Very comfortable recommending/using when the time comes for my needs. For objective value as well, not just returning a favour. In the meantime though, a thank-you gift to pay the ability to access education forward...

Merry EOFY to you both.

 

If i have a roommate move in with me when I move in to my new build an i able to depreciate a portion of the fit and finishings?

I understand i am able to depreciate a portion of capital costs and interest on the loan based in this case.

I also understand there are cgt implications and a cost basis adjustment (all factors I'm considering while working out the most beneficial course of action).

 

Yes. Note also a proportionate loss of the CGT main residence exemption and the negative imapct on the CGT costbase and its affect on the CGT on the land !!! You need to know about third element costs too. I dont generally suggest partial income producing use for new build homes for several years due to a range of complex tax problems.

Eg does s118.192 requires the costbase to reset to market value ? Typically no if you time it correctly but get it wrong it may cost. So calcs of what your costbase is as a home must be compared to market value. It can work both ways. It can lock in some tax free BUT...duty and some other costs get affected.

Depreciation may be more complex. You must INITIALLY occupy with the tenancy at THE SAME TIME but NOT as your home first. Its hard to do and will be contrary to the costbase reset rule in s118.192 so one hurts you and the other benefits. If you move in first then its not available for Div 40 items, just the building (% anyway). You should keep very good records to prove that timing issue

 

If you build and have part of the property rented out before you use that part of the property it would still be new plant and equipment so should qualify for deduction.
But if you didn't rent out part of the property immediately the plant and equipment would no longer be new.

 

There is no need for immediacy. The key test is that of USE for private purposes rather than to produce income. A new build could in theory be vacant for several days or weeks than rented and the assets are still depreciable. develops commonly do this asnd is described in the law as a example of where the issue wont prevent deductions occurring later for the new owner for example or the developer who withdraws it from sale. However there is a conflict between the CGT requirement to occupy as soon as practicable especially if the 4 year new build backdating rule and then absence is to be used. May even seem like a contrived arrangement too. ie Not a "main residence".

You likely cant get the best of depreciation and seek to occupy as a main residence for any new construction.

 

The developer exemption is for trading stock, it can be up to 6 months old yet be classed as brand new.

The trouble with claiming depreciation say after 6 months of living there is to convince the ATO that you were not using that part of the property and it was still brand new