Tax Q&A: Are any exemptions available to me?

Q: My husband and I purchased a house in NSW in November 2010 for $382,000. This was our PPOR. We separated and began renting the house out in November 2011; the value at that time was approximately $420,000. 

My now ex-husband went bankrupt in early 2012, and I took over the mortgage of the property. I paid all the expenses in relation to the property; however, the property remained in both our names due to my inability to refinance until March 2016 (at a value of $525,000), at which point I transferred the property to my name only.

I sold the property in March 2019 for $575,000. It was rented by the same tenants from November 2011 until March 2019. I have been renting for the entire time since moving out of the home. Based on basic calculations, I’ve budgeted for around $30,000 in CGT, but are there are any exemptions available to me?

Sara

A: Establishing a property as a main residence (MR) by occupying it immediately after purchase will make it exempt from capital gains tax when the property is later sold as a main residence. The exemption from CGT can be extended for another six years under the absence rule. So if the property sold at a capital gain within those six years, there should not be any CGT liability.

The condition is that no other property can be nominated as the MR for that same period of ownership. The exemption ceases when another property is nominated as the MR.

In cases of separation and later divorce, ownership is considered separately for each individual; in this case, each will have 50% equity. Where there was no other property owned, the six-year absence rule extends the MR exemption for the 50% interest in ownership.

When you have a de facto or marriage relationship with a new partner who owns a property nominated and used as an MR, sharing that property ceases the MR exemption for you.

The six-year absence rule commences from date of first rental – November 2011. Adding six years takes it to October 2017. Because your property was sold in March 2019, this means there is a CGT liability. Your capital gain will be calculated as the difference between the sale price and the cost base.

The cost base for calculating CGT will be the market value at the date of first rental – November 2011. A valuer can provide that estimate, and it will also include any improvements during that time, along with the costs of sale, such as agent commission and legal fees.

The calculated CGT is then apportioned to exclude the exempt period, which is six years of a total rental period of nearly seven and a half years. The estimated taxable component is 19.5%.

Further, because you owned the property for longer than 12 months, your 50% equity on the property is eligible for a 50% discount. This is the amount to be reported on your income tax return. The rate applicable to this component will be your marginal tax rate.

The settlement with your bankrupt ex-husband for his half, or recovering his share of the loan repayment, is considered a private arrangement.

Need to know

• In the case of divorce, ownership is considered separately for each individual.
• The CGT exemption ceases if you nominate another property as your main residence, including one you share with a new partner.
• Settlements with an ex-partner are private arrangements.

Shukri Barbara

is principal adviser at Property Tax Specialists