Tax Tip 354: The Main Residence Exemption When 1 Owner Rents the Other Owner’s Share

Discussion in 'Accounting & Tax' started by Terry_w, 4th Jun, 2021.

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  1. Terry_w

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

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    The main residence CGT exemption only applies to a taxpayer that lives in their property, or is absence after living there. Where there are joint owners each owner is assessed on their interest in the property separately to each other. This can lead to situations where the main residence is partially exempt and partially taxable.



    Example

    Bart and Lisa buy a property together so they can get into the property market before missing out – they have FOMO!


    Just as they buy Lisa wins a scholarship to Suva University in Fiji to study cranial lobotomy so never actually moves in.


    Bart lives in the property and pays Lisa 50% of the market rent for the property.


    Later they sell the property.

    Bart will pay no CGT on his share as he had lived in the property since purchase and it qualified for the exemption.

    Lisa, on the other hand, will be taxed on the capital gain relating to her share of the property. Since she never lived in the property she could not claim the main residence exemption.

    Even if Bart didn't pay Lisa rent Lisa's share would still not be exempt.
     
  2. Paul@PAS

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

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    Primary reasons
    1. CGT applies to a ownership "interest" and each owner has a individual interest. Barts exemption doesnt pass or relate to Lisa's interest.
    2 Actual initial occupancy and commencement as a main residence is paramount. Not intentions.

    Note also that Lisa's interest could be subject to land tax. In some cases if ONE owner resides (Bert) it means Lisa also gets exemption despite it not being her home. This is because mosts states tax the "owner" and see this as Bart & Lisa Simpson so only one need occupy it as their principal place of residence. But some states have wierd rules if Bart rents two rooms for example. Check.

    This different state land tax approach can confuse some owners who think the same approach applies to CGT. It doesnt.

    Lisa could also live in the home for a time prior to her studies and then her interest may be subject to the CGT absence rules when she moves out. If she rents her 50% its a 6 year window. If she ignores rent and allows Bart free use of the house without paying her any rent Lisa may have a unlimited CGT absence period of time. Its often a strategy for siblings to consider and weigh up debt servicing, property use and CGT with that untimed CGT exemption in mind.