Tax Q&A: CGT Exemptions when Selling

By Sarah Megginson | 12 Apr 2018


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Q: I purchased a property that settled on 7 September 2011. I lived in it for the first two months and then rented it out for 3.5 years.

I then moved back into it in May 2015 and am still living in it now. It is on the market to sell, but the six years is up on 7 September 2017. If it sells after this six-year period, will I be exempt from CGT?
Many thanks, Sara

A: Assuming that you moved into the property as your main residence and you did not live in the property in the initial two months for the sole or dominant purpose of obtaining the tax benefits of the main residence exemption, the property has always remained your main residence due to the operation of the temporary absence rule (provided of course that you have not elected to treat another property as your main residence during the period when the property was rented out).

In this case, any capital gain or loss on the sale of the property now will be fully disregarded under the main residence exemption.

The temporary absence rule applies in such a way that when you moved back into the property the clock was reset, so it will not be necessary to count six years from the time the property was first rented out. The fact that the property was only rented out for 3.5 years before you moved back in (ie in less than six years) means that it has satisfied the conditions of the temporary absence rule.

Therefore, if the property continues to be your main residence until you eventually sell it, you are entitled to treat the property as your main residence for the entire period you have owned the property, including the 3.5 years when the property was rented out, in addition to the periods during which you have lived in the property.

Q: I have the following question regarding investment property and tax implications. I paid the building and pest inspection and conveyancing costs for a potential investment property, which fell through because of the building and pest report outcome. Are these costs tax-deductible?
Thanks, Rajen

A: For an expenditure to be tax-deductible, it must be incurred by you in the course of producing assessable income or carrying on a business, with the expenditure not being capital or private or domestic in nature.

Assuming that you do not own a multitude of properties on such a scale that the leasing activities constitute a business in its own right, then you will need to consider if the building and pest inspection and conveyancing costs were incurred in the course of your incomeproducing activities, to determine if they are tax-deductible.

Given that you had not acquired the property when you incurred those costs, and they are capital in nature as they relate to the acquisition of an income-producing asset, it is my view that these costs are not tax-deductible to you. Further, as the property was never acquired, they cannot be included in the cost base of any asset. 

Need to know
- With the temporary absence rule, a property remains your main residence for six years.
- The rule is void if you treat another property as a main residence.
- Property costs are not tax-deductible if the property is not acquired.

Eddie Chung
Business services
partner at BDO



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