Tax Q&A: Splitting CGT exemption between two residences

By Contributor | 14 Mar 2019

Question: My partner and I both own and live in our own homes and both have children from previous marriages.

If we decide to marry, move into one of the homes and rent the other, does the six-year rule apply? If so, could we, for example, relocate between the homes every three years and rent the other home out to produce income and effectively maintain both homes as principal places of residence?

Also, in regard to another investment property, if I spend $10,000 engaging an architect to draw plans for redeveloping my investment property, but I do not end up building, is this $10,000 deductible against the property rent or is it a $10,000 increase on my property’s cost base?

Thanks, Andrew


Answer: Firstly, it is quite common for each half of a couple to own their own home before they get married. Normally, you can sell your main residence without capital gains tax. However, spouses are only entitled to one main residence exemption for CGT purposes between them. If each member of a couple owns a main residence they must either:

  • select one residence for the exemption during the period they are together, or
  • apportion the CGT exemption between the two residences

Provided the homes meet the requirements for the main residence exemption, they will both be exempt from CGT for the period prior to the couple being treated as spouses. However, from the time the couple get married, only one home can be treated as their main residence for as long as they are married (or living together as de facto spouses) (s 118-170 ITA Act 1997). Each person does not have to have an interest in each dwelling, ie one person may nominate a dwelling owned by their spouse.

Alternatively, both dwellings can be treated as main residences during this period but the exemption must be split between the two dwellings. For example, Kylie bought a house in 2010 and lived in it until she married Jack in 2015, at which point they both moved into his house, which he had owned since 2006. Jack’s house became their main residence for CGT purposes.

If Kylie chooses to sell her house, it will be subject to CGT on any growth in value from 2015, but she will not have to pay CGT on any capital growth during the period before she married Jack.

Kylie can choose to have a separate main residence, but if she does she then has to split the main residence exemption and can only claim 50% on her property. Jack will only be able to claim 50% of the main residence exemption for that same period of time, so only 50% of the gain on each property will be exempt. Therefore, the six-year rule can apply to make both residences exempt.

Secondly, rental deductions can be claimed under ITAA 97 s 8-1 for expenses incidental to the production of rental income derived by the landlord/lessor. Since architect’s plans are not related to the production of rent, it is not an allowable deduction against rental income.

The architect’s costs incurred can only be added to the cost base of the property if they fall into one of the five elements of the cost base for CGT purposes:

  • acquisition cost
  • incidental costs such as cost of transfer, stamp duty, marketing, real estate agents commission
  • ownership cost incurred in connection with continuing ownership, such as insurance
  • enhancement cost, eg non-deductible initial repairs
  • title costs

Need to know
- Married couples are entitled to only one CGT exemption between them.
- The exemption can be apportioned across two residences.
- Architect’s costs are not an allowable rental deduction, being unrelated to rental production.

Lilian Fisher
is partner at
Chan & Naylor Perth



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