Tax Q&A: What are our capital gains obligations?

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Q: Five years ago, we moved from a Melbourne suburb, where we owned a property, to East Gippsland. When we left, we allowed one of our adult children and their family to move into our Melbourne home; no rent was required so that they could save for their own place. Less than 12 months later, they asked if they could buy this house in the future. We agreed and, at the time, ascertained the value to be around the $320,000 mark.

They are now in a position to purchase the property, and so contracts, vendor statements, etc., are in the pipeline, at the agreed-upon purchase price of $320,000.

As we moved out of our Melbourne house in under six years and the selling price of the property will result in no capital gains from when we first vacated it, what are our capital gains obligations, if any?

Bob and Cathy

A: Your question raises many issues, such as:

  • What constitutes a main residence for tax purposes
  • The use of the six-year absence rule
  • The use of the six-year absence rule
  • Market valuation requirements
  • Land tax
  • Stamp duty

Your main residence (your home) is usually exempt from capital gains tax. As a general rule, a dwelling ceases being your main residence once you stop living in it. The dwelling can continue being treated as your main residence for CGT purposes as follows:

  • For up to six years if it is used to produce income
  • Indefinitely if it is not used to produce income
  • If you’re not treating any other dwelling as your main residence during that period

As you have not received rent from your child, there is no time limit on your absence, but this benefit is lost if you are wanting to claim East Gippsland as your main residence for tax purposes.

I assume you have purchased the East Gippsland property, but I’m not sure about any benefits you may or may not be receiving on East Gippsland in relation to both the main residence exemption and land tax. Suffice to say that there are strategies that, if implemented four years ago, would have allowed you these benefits if you are not receiving them.

The current sale of your Melbourne property will need to be at market value and not the pre-agreed figure. If you can use the six-year absence rule, then no CGT will apply (if you moved into the Melbourne home as soon as practicable after purchase), but only if you do not classify East Gippsland as your home.

The state government will use the current market value when calculating stamp duty on the transfer if this is greater than $320,000. There are strategies that could have been used to effectively lock in the $320,000 after the first year to limit stamp duty. Depending on the current market value of the property, your child may receive a full stamp duty exemption as a first home buyer.

The land you own and occupy as your home is your principal place of residence and is exempt from land tax. When you no longer occupy the land as your principal place of residence, the exemption should be removed, and land tax may apply. It is your responsibility to notify the state government when this happens, or else penalties may result.

Need to know

  • The CGT exemption can apply indefinitely if no rent was received.
  • CGT applies if you select another property as your main residence.
  • A stamp duty exemption may apply if a buyer is purchasing their first home.

Ken Raiss is director at Metropole Wealth Advisory

 

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