Q: I have a CGT question – back in 1998, I bought a property with my father and mother and sister all as share title owners. It was our residence that we all lived in.
Then in 2005, I got engaged and bought a property with my now wife, and we made that our principal place of residence. However, I am still part owner of the property with my folks and sister. If we sell the property that I am part owner of (as my folks want to downsize), will I be charged CGT on it after the sale? I know they won’t, as it’s still their principal place of residence but not mine.
I’ve never received income from it, and at the time, we bought it for about $250k, and now it could sell for about $1 million. Would I have to pay tax on my portion of the outcome if we sold it?
A: There are two main tax methods for calculating the capital gains tax from the sale of your main residence. If you moved into the property as soon as practicable, then it would normally be tax-free. If, however, you start off with a tenant, then you need to apportion the gain between the period with a tenant (taxable) and the total ownership period. You can choose to continue treating a dwelling as your main residence for CGT purposes after you move out:
• for up to six years if it is used to produce income
• indefinitely if it is not used to produce income
However, you can’t treat any other dwelling as your main residence for that period. If you rent out the dwelling for more than six years for the first time after 20 August 1996, the ‘home first used to produce income’ rule may apply, which means you are taken to have acquired the dwelling at its market value at the time you first used it to produce income.
"CGT will be based on your share of the net sales proceeds, less the cost base calculated on the original purchase price"
If you use any part of your dwelling to produce income before you stop living in it, you can’t apply the continuing main residence exemption to that part. For both dwellings, you said you moved in immediately after purchase and furthermore moved out from one and straight into the other. You have also said that you did not charge your parents rent for the use of ‘your’ portion, so the ability to use market value when you moved out is lost.
Your CGT will be based on your share of the net sales proceeds, less the cost base calculated on the original purchase price, but can include those costs used to own the dwelling such as rates and taxes, repairs and maintenance, insurance costs, etc. You cannot add interest expense on any borrowed funds used to purchase the property.
At the time of a sale of either dwelling, you must choose which of them you want to identify as your main residence for tax purposes. If it is the one with your parents (1998), then the home purchased with your now wife (2005) will be treated as an investment for the corresponding period, and any future sale will need to apportion the capital gains.
If you choose the 2005 property, then tax on the sale of the 1998 property will be based on the original purchase costs, not a calculated market value. Your portion of the capital gain will then be reduced by 50% for calculating your tax.
Need to know:
- Not charging rent prevents you from using a property’s market value for CGT exemption.
- CGT will be based on your share of the net sales proceeds, less the cost base.
- The cost base can include rates, taxes, repairs and insurance.
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