There are many reasons why you may find yourself having to move out of your home. Perhaps a work opportunity has come up which requires you to move away from where you live; perhaps you have decided to go on an extended sabbatical in a foreign land to quell your travel bug; or perhaps you need to temporarily relocate to look after a relative who is seriously ill.
For whatever the reason, moving out of your main residence may give rise to taxation consequences, so it is important that you understand those consequences before you pack up and leave.
Main residence exemption
● Generally, if you own a capital gains tax (CGT) asset and you make a capital gain upon its sale, you are required to pay CGT on the capital gain.
● If the CGT asset is your main residence, any capital gain you derive from the property is generally disregarded.
● You are normally only allowed to have one tax-free main residence at any time, so if you buy a new property, move out of your existing home, and use the new property as your main residence, the CGT exemption on the old home may be affected.
● If you start using your main residence to produce income, even if you do not buy a new property, the main residence exemption may also be compromised.
If you do not buy another property
● If you move out of a property that is your main residence but do not buy or start to use another property as your main residence, provided that you moved into the property as your home as soon as was practicable when you originally bought it, the property can continue to qualify for the main residence exemption at least for some time. This is so even if you rent the property out after you move out.
● Under the ‘temporary absence rule’, you may choose to continue to treat the property as your main residence, but if you make that choice you cannot treat another property that you own as your main residence, even though the other property really is your main residence.
● If you rent out the property, you can continue to treat it as your main residence for up to six years.
● If you do not rent out the property at all, it can continue be your main residence indefinitely.
● Further, if you move back into the property just before the six years expire, live there as your home and vacate it again, the temporary absence rule effectively allows you to ‘stop and reset the clock’ and you are entitled to another six years if you rent the property out again.
● If you rent out the property for more than six years, sell the property and make a capital gain, you may be required to pay an apportioned CGT on the property. Normally, the apportioned capital gain will be calculated with reference to the period of time during which the property was not covered by the main residence exemption as a proportion of your entire ownership period of the property.
For instance, if you own the property for 10 years before it is sold, and the property was not covered by the main residence exemption in the last two years, the taxable capital gain will normally be apportioned by multiplying the capital gain on the property over the 10 years by 2/10.
However, the acquisition time and cost base of the property may be modified if the following conditions are satisfied:
● You would only have been entitled to claim a partial main residence exemption on the property because it was used to produce income during your ownership period on or after 20 August 1996; and
● You would be entitled to a full main residence exemption if the property was sold just before it first started producing income.
If these conditions are satisfied, you are deemed to have acquired the property at its market value when the property first started producing income. To defend the market value that will be used to calculate the capital gain, you can consider obtaining a valuation, but you will need to instruct the valuer to determine the value of the property (perhaps retrospectively) at the time when it was first used to produce income.
By way of an example, assume that you originally bought a home after 20 August 1996 for $500,000 and lived there for two years; the property was then rented out for eight years and sold for $800,000. When the property was first rented out, the market value of the property was $550,000. You did not own another property that you used as your main residence during the 10 years.
If you were aware of the six-year absence rule but were not aware of the special rule that modifies the time of acquisition and cost base of the property, you would have calculated the taxable capital gain as:
($800,000 - $500,000) x 2/10 years = $60,000
However, if you applied the modification rule correctly, the correct amount of taxable capital gain would have been:
($800,000 - $550,000) x 2/8 years = $62,500
Naturally, the tax office would not have been very happy if you did not apply the modification rule correctly, as you would have underpaid CGT. If detected, you might have found yourself having to pay the tax shortfall, as well as penalties and general interest charges.
If you buy another property
If you buy or start using another property you own as your main residence after you have moved out of your existing home, and you choose not to continue to treat the old home as your main residence, the old home will cease to be covered by the main residence exemption. To that end, it is a common misconception that you have the discretion to pick one of the properties and treat it as your main residence.
Contrary to this misconception, apart from the temporary absence rule discussed above, the law provides that a property may only be regarded as your main residence and qualify for the main residence exemption if you live in it as your home, which is a question of fact.
Therefore, if you keep both properties and choose not to continue to treat the old residence as your main residence, the new property will be treated as your main residence and the old property will cease to be your main residence from the date you start using the new property as your main residence.
On the other hand, if you choose to continue to treat the old property as your main residence, the new property will not qualify for the main residence exemption (whether or not you actually move into the new property as your home); in which case the temporary absence rule allows you to continue to treat the old property as your tax-free main residence.
If the old property is not rented out, you may continue to treat it as your main residence indefinitely. If the old property is rented out, then you may continue to treat it as your main residence for up to six years before it is no longer covered by the main residence exemption.
While the main residence exemption rules above may appear reasonably straightforward, a situation involving multiple properties where you move in and out of the respective properties multiple times over a long ownership period or you maintain two residences over the ownership period could render the analysis and application of the rules surprisingly complex.
Further, not being able to access the relevant information to perform the analysis could pose an addition challenge, which is why record-keeping is critical in ensuring that you will be able to comply with the CGT rules as you are required to do under the law.
is Partner, tax & advisory, property & construction, at BDO (QLD) Pty.
Important disclaimer: No person should rely on the contents of this article without first obtaining advice from a qualified professional person. The article is provided for general information only and the author and BDO (QLD) Pty Ltd are not engaged to render professional advice or services through this article. The author and BDO (QLD) Pty Ltd expressly disclaim all and any liability and responsibility to any person in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this article.
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