​Tax Q&A: CGT issues and subdividing to occupy

By
15/01/2015 

CGT ISSUES WHEN SELLING OWN HOME AND MOVING INTO INVESTMENT PROPERTY

Q: We are a married couple and have a rental property (since 1994) and live in another property. Now we want to sell the current property so we can move into the rental property since it is closer to the city, but the rental property is a bit old. We have been told that one way to reduce the CGT is to move back to the rental property and live there for a certain number of years then sell it to buy another property to live in – not for investment. Is that correct?

A: Where a property is fi rst established as a rental on purchase, it will be subject to CGT when sold at a gain. If held for longer than 12 months it can qualify for a discount of 50% on the CG.

If that rental property is later occupied as a main residence (MR), calculated CG will be apportioned between the period occupied as rental and the period occupied as MR measured by the number of days rented and number of days occupied.

The portion relating to the period the property was occupied as a rental will be assessed and subject to tax.

Occupying the now rental property as an MR will slowly reduce the taxable component. It may be a slow process considering that existing growth has compounded over 20 years.

For other strategies to minimise the CGT, consider selling at a time when you have capital losses to offset against. Alternatively the sale can be deferred to a time when you have less income arising from a year off work or similar break.

With 50% CGT discount and then split between two of you, the pain may not be as bad as expected. Estimate the figures. Selling in July defers the tax payment for another 12–15 months, helping with cash flow. Note that the relevant date for CGT is the contract date and not the settlement date.

SUBDIVIDING TO OCCUPY
Q: In 2000, a friend and I bought an equally-shared property at Aurisch Avenue in Victoria with the intention of building two units for our own residence in the future. At that time, we were not financially ready to build on it and rented out the existing house until 2011. Two units are currently being built and we have applied for a subdivision.

We are uncertain as to how we treat our properties under our current situation:

  • The property was bought in 2000 under both our names on one title
  • The property was rented for some periods from 2000 to 2001
  • The property will be subdivided
  • There is no sales transaction as our families are moving into our respective units as our residence
  • We have no intention of selling any of the units in the foreseeable future
A: Where a property is first established as a rental on purchase, it will be subject to CGT when sold at a gain. If held for longer than 12 months it can qualify for a discount of 50% on the CG.

If that rental property is later occupied as a main residence (MR), then calculated CG will be apportioned between the period occupied as rental and the period occupied as MR measured by the number of days rented and number of days occupied.

The portion relating to the period the property was occupied as a rental will be assessed and subject to tax.

Where a jointly owned property is later subdivided and two residences constructed, the position is that both of you own 50% of the each of the new residences.

Where you each occupy a property and no sale or transfer occurs, there will be no CGT liability until sale/transfer. It will be deferred to when there is a sale or transfer. Keep clear documentation of purchase details, construction costs and maybe obtain a quantity surveyor’s depreciation report. It may also be an advantage to get valuations.

MR exemption will only be available for 50% which is owned by the party occupying it.

CGT would likely be payable where 50% is transferred to the other party. On development the CG may be higher due to the increase in value resulting from the improvements. Consider transferring 50% equity to the other before DA and construction.

The tax expert: Shukri Barbara. CPA & CTA and principal adviser at Property Tax Specialists

Disclaimer
The views provided are of a general nature only and should be considered as general education. Readers should not act on the information above without obtaining professional advice relevant to their circumstances. The article is intended as information only.


 

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