Tax Q&A: PPOR exemption

Q: In 2015, I purchased a property with my thenpartner with a residential mortgage; however, we never ended up moving into the property and separated shortly after the purchase.

The property was rented out at the time and the tenants have remained there. I bought my ex out in February 2018 and remortgaged the property in my name.

In the last two tax returns I completed, I listed the property as my principal place of residence; however, I have not ever lived there.

I’m conscious that if I sell the place and make any money, then I will need to pay capital gains tax because I haven’t lived there. I’m aware of needing to live in the property for at least 12 months to be exempt from CGT, as evidenced through my tax return referring to the property as my primary place of residence, and the utility bills. I’d like to know if there is more to the process than this, such as the time frame in which I would need to sell the place.

Kind regards, Helen

A: Where you say that you have the property “listed as [your] primary place of residence” in your tax returns in the past, I assume you have put the address of the property as your ‘home address’. However, this is not sufficient to make the property your main residence for CGT purposes.

As the property has been tenanted, it is important that you declare the rental income and claim the associated rental expenses in your tax return. In this case, the tax office would already be aware that the property is income-producing.

If you move into the property now, provided that you do not own any other property that you have been living in as your principal place of residence (PPOR), the PPOR exemption will start applying to the property from the date you move in. This does not cover the previous period when the property was rented out. There is generally no ’12-month rule’ related to your entitlement to claim the PPOR exemption, but you do need to genuinely move into the property and live in it as your home to qualify.

Subsequent to moving into the property, if you sell it down the track, any capital gain you make will need to be apportioned based on the period during which the property was not your PPOR, relative to your entire ownership of the property, in order to determine your taxable capital gain.

This apportionment would be more complicated in your case because your interests in the property would need to be treated as two separate interests for CGT purposes:

• the 50% interest you acquired in 2015, and
• the remaining 50% interest you acquired from your ex in February 2018

As you have owned both interests in the property for more than 12 months, you will also qualify for the 50% CGT discount.

Given the apportionment required, the longer you live in the property before you sell, the smaller your eventual capital gain will be. Further, in calculating the prima facie capital gain, any holding costs related to the property (eg interest on loan, repairs or maintenance costs, insurance premium, rates, etc.) that you have not claimed for the period when the property was not available for rent may be added to the cost base. This would reduce the prima facie capital gain amount and ultimately reduce the apportioned taxable net capital gain.

Need to know

• Listing a property’s address as your home address does not make it your PPOR.
• To qualify for the main residence exemption you need to genuinely move into the property and live in it as your home.
• Capital gains need to be apportioned based on the period when the property was not your main residence.

Eddie Chung

is tax and advisory partner

at BDO