Q: I bought a property in Bentleigh in 2014 as my PPOR. I got married in April 2017 and moved into my wife’s property, which she bought in North Melbourne in 2015. The plan is to live at her place for two years and rent out my Bentleigh house. After two years (in 2019), we will move back to my place in Bentleigh.
Would being married and living in North Melbourne automatically change my PPOR? When I move back to my place in Bentleigh and live in it, would I automatically be exempt from capital gains due to the six-year rule? If I plan on selling my property in Bentleigh any time in the future, would I be subject to capital gains tax based on the scenario above?
Many thanks, Ron
A: I have assumed you made the Bentleigh property available for rent on the date you got married and moved into your wife’s North Melbourne property (April 2017).
Broadly speaking, spouses are only entitled to one main residence exemption for CGT purposes between them. Provided the previous homes meet the requirements for the MR (main residence) exemption, both properties should be wholly exempt from CGT for the capital growth derived during the period prior to you being spouses.
So, assuming you elect your wife’s North Melbourne property to be your MR from April 2017, the capital appreciation on Bentleigh from the date of purchase through to the date you made it available for rent will be taxfree. Going forward, the cost base of Bentleigh for CGT purposes will be the market value of the property in April 2017. As a taxpayer can only have one MR, the ‘six-year rule’ will not apply to the Bentleigh property. As such, if you were to move back into Bentleigh after two years and then sell the property after a further five years, the taxable capital gain on Bentleigh would be broadly calculated as follows: Capital gain = sale price (proceeds), less the market value of Bentleigh in April 2017 (the cost base).
The capital gain (proceeds less cost base) would then be partially reduced by the MR exemption. In this example, broadly five-sevenths of the gain would be exempt – the five years you lived in it as your MR over the seven years since you made Bentleigh available for rent. You would then further reduce the capital gain by the 50% CGT discount for owning the property for more than 12 months. In an alternate situation, you could elect for the Bentleigh property to continue to be your MR for the whole period, and your spouse could elect for it to be her MR from April 2017. In this situation, the capital gain on sale of the Bentleigh property would not be subject to CGT.
"You could apportion the exemption between both properties,
whereby each of you receive a 50% exemption on your properties on eventual sale"
However, the North Melbourne property would then be partially subject to CGT upon eventual sale, as it would no longer be considered your wife’s MR from April 2017. Finally, as opposed to electing one residence for the exemption, you could also apportion the exemption between both properties, whereby each of you receive a 50% exemption on your properties on eventual sale. This alternative requires further analysis.
The election of which property is your and your spouse’s MR can be determined at the time of sale. You should also consider the relevant State Land Tax implications of which property you choose as your MR.
Need to know
- It is possible to apportion the CGT exemption across two properties.
- However, you can’t access the CGT exemption on two properties at the same time.
- Capital growth is exempt from the date of purchase until the day it is on the rental market.
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