In part 3 of our Tax insights | investing in property series, we discuss the CGT main residence exemption to situations involving multiple main residences.
Multiple properties – which do you choose as your main residence?
For some owner-investors, a simple but effective property strategy can involve owning and occupying a dwelling and “trading up” from time to time by taking advantage of the tax-free treatment of capital gains from selling a main residence.
However, if there are multiple properties which qualify as a main residence, investors will need to combine lifestyle choices with investment decisions in order to arrive at an optimum result.
Some investors are ready, willing and able to relocate back to a former main residence in order to reset the 6 year concession period that extends the CGT main residence exemption in periods of absence; this may not be practicable for other investors when considering school choices, transit times and interstate investment.
Against this background, we identify five key factors to consider when making a decision to apply the CGT exemption to a property for a particular period:
- If the 6-year rule is about to lapse: once you have been absent for more than 6 years, any capital appreciation thereafter will not be sheltered by the main residence CGT exemption (unless you move back in, at which point the exemption period is reset).
For example, some investors may wish to take the opportunity to realise a former main residnce tax-free before the 6-year period expires, particularly where it is desirable to reinvest the equity in another asset with greater capital growth prospects.
Read Part 2 of our Tax insights | investing in property series if you are an Australian expat as to why you might wish to sell a former main residence as the 6-year concession period is due to expire.
- Capital appreciation: as you may only choose one main residence to qualify for the exemption for any particular period, it is usually (but not always) better to choose the property which has achieved the greatest capital appreciation over the same period.
- Cost base: a capital gain is broadly calculated as the proceeds from sale less the asset’s “cost base” (acquisition costs, incidental costs and undeducted improvement costs); the greater the cost base, the smaller the capital gain. Cost base calculations are not straightforward and we recommend you obtain professional advice.
- Asset improvement strategies: in some cases where a former main residence is substantially developed or redeveloped, entrepreneurial effort may result in a profit on sale being assessed as ordinary income and cause the CGT main residence exemption not to apply.
- Indefinite holding strategies: if a property will be held indefinitely then there is no utility in considering the exemption for that property – it is only relevant for decision making purposes for the properties which will be sold at some future point.
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This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article.