Tax Tip 237: What’s the cost base of a Main Residence if Not initially counted as the main residence

Tax Tip 237: What’s the cost base of a Main Residence if Not initially counted as the main residence?

Some people may live in a property as their main residence since it was purchased , yet not be able to use the main residence exemption on that property. They may not be able to use the main residence exemption because they have counted another property as the main residence for an overlapping period.

In these cases, how is the cost base worked out?

Example
Homer buys Property A on 1 July 2010 and moves in on settlement and establishes it as his main residence.

On 1 July 2012 he moves out and rents

On 1 July 2013 he buys Property B and moves in on settlement and establishes it as his main residence.

On 1 July 2014 he sells Property A and uses the 6 year rule to continue to treat the property as his main residence from the date he moved out on 1 July 2012 until 1 July 2014.

This overlaps the period when he is living in Property B, so when he sells Property B it will not be CGT free.

If Homer sold Property B on 1 July 2019 what would be its cost base?



Homer, in the above example, would need to work out the cost base of Property B and then apportion it over the full ownership period using the formula outlined in s 118-185 ITAA97.

The total period of ownership is 6 years (1 July 2013 to 1 July 2019)

The period it was not able to be counted as the main residence was just 1 year (1 July 2013 to 1 July 2014).

So the portion of the capital gain subject to CGT is 1/6 or 16.7%.



But also note that expenses called 3rd element cost base expenses incurred while living there can be used to increase the cost base making the Capital gains even lower (this is applied before apportioning).

 

Common question in that situation concerns when / how to get it valued. I explain a valuation is only permitted by s118-192 and this is applicable ONLY when a property is 100% exempt from CGT from the time it was acquired and then first used to produce income.

Common mistake people make is thinking they can apportion a gain based on a value at one point in time and its value / selling price at another point. Only TIME can be apportioned.

 

What about the six month overlap rule

 

I don't think that could apply to my example as the existing main residence was income producing