Tax Tip 208: Main Residence CGT Exemption and Death During Construction

Under s118-150 ITAA97 a person can claim the main residence CGT exemption for up to 4 years prior to occupation of a house being constructed once it is completed – if they live there for at least 3 months and do not claim another property during this time.

See

Tax Tip 99: Vacant Land and the CGT Exemption Tax Tip 99: Vacant Land and the CGT Exemption

and

Tax Tip 107: CGT exemption not stay in newly constructed house for 3 months Tax Tip 107: CGT exemption not stay in newly constructed house for 3 months


What would happen if the owner died during construction and could not live there for 3 months?


Luckily there is a concession which covers this scenario and can be found at s 118-155 ITAA97[1]. The surviving joint owner of a joint tenancy or the LPR of the estate can choose to apply the main residence rule for the shorter of 4 years before the death or when the individual acquired the land.


Example

Homer and Marg are renting and buy land with the intention to build on it. The land has skyrocketed in price, but after 3 years they still have not done anything with it. They then realise time is running out so enter into a contract with a builder. Homer suddenly dies from radiation poisoning. If Marg is a joint tenant owner she will become sole owner bypassing the will. This legislation allows Marg to claim the main residence exemption on the whole property from the date it was acquired as long as she moves in within the 4 year period from purchase contracts.

If Barney was Homer’s executor and they held it as tenants in common it could still be CGT exempt as long as it is completed in time. In this case Barney doesn’t need to move into the property for the exemption to apply but it can be passed via Homer’s will as if it was Homer’s main residence for the 4 years prior to his death.


[1] INCOME TAX ASSESSMENT ACT 1997 - SECT 118.155 Where individual referred to in section 118-150 dies

 

Here is a private binding ruling where the owner died during construction
executor completed it and sold and one of the 2 houses being constructed was able to be the main residence of the deceased and sold CGT free
1052166907828
1052166907828 | Legal database

 

The ATO reasoning is fairly solid in that ruling but unusual. It refers to a INTENTION to occupy Unit 1 which was not and cant be fulfilled. The property is not and was not the deceased persons main residence. The issue here is about how the land is affected (and the build). Intenresting that the BUILD element relies upon s 118-150 which governs buiklding a new residence etc. Normally this has a three month actual occupancy rule. . However that is contemplated in s118-155

Where individual referred to in section 118-150 dies
(1) This section applies if the individual referred to in subsection 118-150(1) dies:
(a) after the work began, or the individual entered into a contract for it to be done, but before it was finished; or
(b) after the work was finished but before it was practicable for the * dwelling to become the individual's main residence; or
(c) during the period of 3 months referred to in paragraph 118-150(3)(b).

Then

(3) If there was already a dwelling on the land when the individual acquired the interest in the land and someone occupied it after that time, the period in subparagraph (2)(b)(ii) starts when the dwelling ceased to be occupied so that it could be repaired or renovated.

As they resided continually ON the land in a caravan dwelling that rule does not seem to be relevant. But a caravan must be ON the land. The taxpayer was never absent