Tax Tip 337: Living in a property but Claiming another Residence as the Main Residence

Discussion in 'Accounting & Tax' started by Terry_w, 18th Feb, 2021.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Where a person owns 2 properties, each of which could be their main residence, they have a choice on which one to claim the main residence exemption on. Sometimes it might be best to not claim the exemption on the one you are currently living in if the other property has had a larger capital gain.



    Example

    Homer buys Smith Street on 1 Jan 2020 and he lives in it as soon as it settles.

    Later, a virus plague hits, and Homer wants to get out of Sydney to avoid becoming a zombie. He buys a second property in Whoop Whoop on 1 Jan 2021 and lives in it as soon as settlement happens.

    The virus goes away, and no one becomes a zombie.

    Smith Street doubles in value, but Homer likes the Whoop Whoop property and stays living there.

    After 5 years in Whoop Whoop he is bored and ready to return to the city.

    He sells Whoop Whoop for $500,000 with a purchase price of $450,000. Not much of a gain so he figures it would be better to claim the main residence exemption on the Smith Street property which has more than double in value. Homer can do this by virtue of the 6 year rule under s118-145 ITAA97.

    But how will Whoop Whoop be taxed?



    When you live in a property and don’t claim the main residence exemption on it the property will be taxed based on section 118-185 ITAA97.

    S 118-192 cannot apply unless the property had become income producing.

    S118-185 applies and the percentage subject to CGT will be 100%.

    The taxpayer can then work out the cost base of the property, and the third element cost base expenses, while living there even, can be used to reduce the capital gain on the property – but cannot make a loss.



    In Homer’s situation the property had increased by $50,000 but he is likely to have no taxable capital gain as the cost base expenses will exceed $50,000.

    Had Homer claimed the main residence exemption on Whoop Whoop property, if he later sold Smith Street, he would have paid a large amount of tax. By claiming it on Whoop Whoop both properties could be sold without CGT.



    Over to Paul now!
     
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  2. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Where two properties may each be elegible for the actual main residence exemption or the absence exemption the choice is usually made when the first property is sold.

    Care should be taken since the ABSENCE exemption has some traps. More common is as Terry describes where one property may be a major gain and another a loss or a lesser gain. Then there is the potential for the future gain on the retained one. Sometimes the tax consequence is close to the same and other times it highly evident. In which case claiming the exemption will DEFER any final consequence to the property being retained. There is also the overlap concession of 6 months to consider at times.

    One trap to the dual MRE issue is where two spouses had / have different property that was their former main residence. They dont both access a complete concession. Most assume they do and seek tax advice to learn of that problem. Again its a case of choosing the correct tax outcome based on expected cost.

    I would estimate I assist around 30+ taxpayers with these decisions each year. The advice also ensures that they keep and maintain proper records for the property being retained. It often means non-deductible ownership costs can be used to reduce a future CGT amount. Without advice they wouldnt know that.

    The start point for ALL property owners is maintaining a continual CGT record for EVERY property they own. Including their own home. Just because it might be exempt doesnt mean it will always be. Eg if a home has been owned for 10 years and is 100% exempt and is rented out for 1 week on Airbnb do you have a record of all the ownership costs in the past 10 years ?? These can be ADDED to the costbase which is then subject to a time apportionment. eg 7/3653 or .10%. Selling costs will also be included in cost. This can and usually will wipe out any CGT profit.

    Here is a free copy
     

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  3. Patrico1966

    Patrico1966 Well-Known Member

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    Great work from both of you guys. Posts are full of very relevant information.
     
  4. newhopper

    newhopper Member

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    So it is possible to own 2 properties (each of which has been PPOR at some point), and still choose which one to select as being exempt from CGT at sale time (assuming 6-year rule satisfied)?

    Some other articles I read seem to suggest that the property you live in after moving out of the PPOR needs be a rental or living with family/friends etc.

    e.g. If a person has PPOR 1, bought PPOR 2, moved back into PPOR 1, PPOR 2 can still be the CGT-exempt property?

    Thanks
     
  5. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Some other articles I read seem to suggest that the property you live in after moving out of the PPOR needs be a rental or living with family/friends etc.

    That isnt the case. A person could own and not rent two or three properties. However each must be checked if it complies as a MAIN residence and only one can be on any day then yes with the absence rule or actual occupancy of another either could be eligible but often not alwasy for all the same days etc. The key issue if a property is rented for the first time AND has previously been 100% exempt can be s118.192 which resets a costbase. There can also be strategies to fiddle with that rule so it does / doesnt apply and it could allow a different type of calculation. The taxpayer gets to choose to the extent that they can. It may be a case of deferral of the tax issue too. eg As you indicate with PPOR 2. This pushes the tax burden onto PPOR 1 for when it is sold...if ever. If the owner dies in PPOR1 the CGT issues could even disappear.
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    see my recent tax tip on this
     
  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    just realised that this is that tax tip! Did u read the opening post?
     
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  8. PC2022

    PC2022 Member

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    Hi @Terry_w Thank you for your great post. This is my first post as new member in this chat. I hope my account setting is right so I will get notification when you answer this

    Using your sample from original post but with slight changes of events:
    1. Homer purchased Smith St in 2020 and lived here
    2. Homer purchased Whoop Whoop in 2021, moved out of Smith St and lived in Whoop Whoop
    3. After 6 months, Homer moved back into Smith St and rented Whoop Whop
    4. After 5 years Whoop Whoop being rental property and Smith St being main residence, Homer moved back into Whoop Whoop

    Question
    1. Can I choose to make Whoop Whoop my PPOR (full exemption) under the 6 year rule although it has been rented and there is another property under my name (Smith St)?
    2. Can I choose to make Smith St subject to CGT tax? if yes, will the cost base be the original purchase price or market value in 2021 when I moved out of Smith St?
    3. If answer to no 1 and 2 is yes, can my holding cost in Smith St got added on to Smith St cost base?

    Thank you so much in advance.
     
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    PPOR is a term used for land tax, not CGT but this thread is about CGT so I will assume you meant 'main residence'. I also assume you are Homer!

    1. It will depend on the circumstances but it could be possible
    2. Yes
    3. not initially because the cost base would be reset to market value when it is first rented out and you would be claiming the expenses against the rent. But after you moved back into Smith street it may be possible that they are cost base expenses while you are living there.

    see
    Tax Tip 318: Can you Claim 3rd Element CGT Cost Base Expenses while living there? http://bit.ly/3qX9Nsm



    Best to seek out specific tax advice
     
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