Tax Tip 326: Claiming the Main Residence Exemption over 2 or more Titles

The law in relation to capital gains tax does not restrict the main residence exemption to just one title block. A house could straddle 2 lots of land with main residence exemption being used to keep both lots tax free. It could apply in situations where the block next door is acquired. It could apply where 2 units are used together as if they were one unit.

There are various conditions to get the exemption on both though. All the usual conditions apply, plus all the land would need to be sold together under one contract.


Example 1

Homer lives next door to a vacant lot. It then comes up for sale and Homer buys it to park his car on and let the kids play on. The total land size is less than 2 hectares. A developer comes along and wants to buy both and Homer sells both under one contract. The exemption could apply to both.



Example 2

As above but Homer sells the vacant block to Ned Flanders and the lot with his house on to Mr Burns. There are 2 separate contracts.

The exemption could not apply to the vacant lot.


Example 3

As in example 1 but the the land next door has a house on it. Homer removes part of the fence and they use the second house to store things and as a large bedroom for Bart.

Homer sells both lots to a developer under one contract.

The exemption could apply to both.


Example 4

As in example 3 but the house is rented out and then both lots are sold to a developer under one contract.

The main residence exemption could not apply to the second block.

 

I came across a challenging one recently

A owned a unit.
A met B several years later
B purchased the unit next door.
They knocked a opening through and shared one larger apt. A + B from that time. A owed Unit A and B owned Unit B.

Later A decided to rent a portion of their apartment to see if renting could work. They then used 1/4 of A and 100% of B as their home.
Later they rented it all out as one dwelling.
They later returned but bricked up the gap and then sold A and B under seperate contracts within 6 years. They thought they may both have an exempt dwellings. No.

Does the MRE apply to A ? I think it did for a portion of time and on absence only for a % that was the MRE prior to departing and as they never reoccupied the other 3/4 before extending the lease to the same party it contaminates the MRE. But when the wall was later bricked up that ceases and only B remains exempt therafter. s118-192 wont apply to reset the costbase of A but will for B since 100% of the use of A prior to departure was not 100% used as the main residence. And there are spouse issues with seperate exempt assets and time apportionment of A. Then a spouse issue for a partial exemption for a portion of time for both A and B at points in time.

I reached out for independent technical advice and it was to seek an ATO binding private ruling. No existing rulings cater for this degree of complexity as one public ruling.

 

Authorisation Number: 1051450174169

Date of advice: 7 November 2018

https://www.ato.gov.au/law/view/document?docid=EV/1051450174169

 

Yes a simpler scenario.

 

This tip is underutilised!

 

Many people including many tax agents think "adjacent land" needs to be next door and also in same names

1. Adjacent land can be around the corner or nearby if its connected. eg Fred lives in Smith Street and two blocks way has a lot where he keeps his boat and his caravan. Occassionally when the mnissues gets annoyed he may even sleep a night in the van and play cards with a few mates. There is a requirement regarding USE of the land that does need to be met. eg Kerry Packers bought up many titles to make a compound. Or Davcid may own the neighbouring lot which is used by him to grow flowers and some fruit. When his kids were younger they had it setup for soccer.
However if Freds land was NOT used by him as part of the use of the main residence then the main residence exemption wouldnt also apply to the adjacent land. eg Fred has it fenced off and allows his Dad to use it to grow flowers for his kiosk.

2. Fred and Wilma's home is in joint names. The spare lot is just in Freds name. No problem. But if the land was in a company name it fails. ONE of the people who reside in the main residence must be a owner of the land. And it cant be used to produce income.