Tax Q&A: Am I going to get lumped with a tax bill from a sale?

03/08/2018

Q: I just read an article in your magazine about capital gains tax and the six-year rule, and I have been trying to research it as I have just sold my rental property and wish to know if I am going to get lumped with a tax bill or not from this sale.

I bought the unit in 2007 for $135,000 and lived in it until 2015, when I bought a house and rented the unit out. I have since sold the house as I had to move to Queensland for family reasons.

The unit was rented out for two years in total and has been sold recently for $166,500. I have no idea what the tax implications are and if I have to pay capital gain tax or not. I have found an online calculator, but it was not very helpful at all! I would love to hear your thoughts. 

Thanks, Josie

A: Your main residence (your home) is generally exempt from capital gains tax (CGT). Full exemption is received if you move in immediately on settlement and the property has a dwelling on it. You must also occupy and live in the property as your home.

"You will need to choose which property you identify as your main residence for capital gains tax purposes"

Generally, a dwelling is no longer your main residence once you stop living in it. However, you can choose to continue treating a dwelling as your main residence for CGT purposes even if you no longer live in it. 

You can treat the dwelling as your main residence for up to six years if it is used to produce income, or indefinitely if it is not used to produce income. You generally cannot treat any other dwelling as your main residence for tax purposes during the same period. 

With multiple properties, such as in your case, you must make the choice of which dwelling will be your main residence when preparing your tax return for the income year in which a CGT event happens to the dwelling. 

The best tax outcome is then chosen. You have two properties that you have used as your home, plus they have an overlap ownership period, ie between 2015 and 2018. 

From your question, I am assuming that in each case you moved into the unit and the house immediately after settlement. You will therefore need to choose which property you identify as your main residence for tax purposes. 

The exact overlap dates are needed, as it appears that both properties were sold in the same tax year. In this case, you have the following options to consider with regard to capital gains tax application:

• Option 1

You may choose the unit as your home and utilise the six-year rule. This will mean the entire capital gain on the unit will be tax-free but the capital growth on the house up to the sale (exchange date) of the unit will be taxable.

• Option 2

You may elect to value the unit as at the date of purchase of the house, and any capital growth from that value will be taxable, while the capital growth on the house will be totally exempt.

Note that, whichever of the above options you choose, any capital gain you declare would have the 50% discount applied as you have owned both assets for longer than 12 months.

Ken Raiss

is director of

Metropole Wealth Advisory