Tax Q&A: Does 6-yr rule apply for a transfer (not sale)

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Question: My question is regarding whether I would still be exempt from capital gains tax if I transferred my primary residence to a family member.

I purchased the property from my sister back in 2011, and I lived in it until mid-2013. I moved out to rent elsewhere, and I now plan to transfer the property to my brother. So I was wondering if the six-year rule applies in a situation where it is just a transfer and not a sale.

I purchased the property for about $180,000, and I think it is worth about $340,000 now.

Thanks, Billy

Answer: I wish I had a brother like you, Billy! That’s a really nice thing to do. Nonetheless, the circumstances are a little bizarre, because in this situation you basically gave your sister $180,000 in 2011 and now you are effectively giving your brother $340,000. Ideally, your sister could have given the property straight to your brother and you would have been $180,000 better off. In addition, stamp duty would have been paid only once, instead of having to be paid twice. 

To answer your question, in my opinion, yes, the six-year rule with respect to capital gains tax exemption for main residences would still apply. 

The six-year rule enables you to treat a dwelling as your main residence for a period of up to six years, even if you no longer live in it. The rule applies in this case because the Australian Tax Office treats the transfer of a property, for example to a family member, in the exact same way as it does a sale, despite the fact that no money is changing hands. The ATO will deem the transfer of your property to your brother to be at market rates; that is, at $340,000 rather than $180,000.

Furthermore, because you rented another property during your time away, as opposed to purchasing another property, the home in question remains your main residence. 

As a result, you would still be entitled to the six-year tax exemption for principal places of residence, since you never declared another property to be your main residence. 

In your specifi c case, I would suggest that you get a valuation done by a professional valuer at the time of the transfer. This would assist your brother if he ever needed to pay capital gains tax in the future – in which case his his cost base would be established at the highest possible value. Presumably, the value set by the valuer will be higher than the amount shown as the council valuation.

Bear in mind, however, that your brother will still need to pay stamp duty on the transfer at market rates. Alternatively, if you leave the property to him in your will, then you could avoid having him pay stamp duty on the transfer, which would be a better result for him. 

The rules, however, may differ if you are transferring a property to a former partner in the event of a relationship breakdown, or to the trustee of a special disability trust.

Need to know
-The ATO treats property transfers like sales, where capital gains tax is concerned
-The transfer of a property to another family member is deemed by the ATO to be at market value
-Professional property valuations are usually higher than council valuations


Kym Nitschke
is managing partner at
Nitschke Nancarrow Chartered Accountants

 

 

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