Capital Gains Tax implications when each spouse claims a separate dwelling as the main residence.
Here is an unusual, but interesting situation we came across when preparing a 2014 Tax Return for one of our clients.
Our client bought a property (“First Property”) in 1999 and lived in it until 2012. She and her de facto purchased a new property (“Second Property”) in 2012 and moved in. Her first property was rented in 2012 and sold in 2013.
Our client wanted to know if the First Property remained her principal place of residence and the Second Property became her de facto’s principal place of residence, should there be any Capital Gains Tax (CGT) payable on the first property?
Property sold in Dec 2013 and couple married in April 2014.
To answer this somewhat complex question, we turn to Section 118-170 of the Income Tax Assessment Act 1997. This part of the act applies where during a particular period a taxpayer and their spouse have different dwellings that qualify as the main residence of each. In this case each spouse will be required to either:
- choose one of the dwellings as the main residence for both of them
- nominate different dwellings as their main residence.
In the case where a nomination is made, the main residence exemption applies as follows for the period that the spouses had different main residences:
- where a spouse’s interest in the nominated dwelling is 50% or less, then that spouse will be entitled to an exemption on that interest for the whole period
- where the relevant interest nominated is greater than 50%, then that spouse will be entitled only to an exemption in respect of that interest for half the period.
To wrap up, we have a situation where the first property is solely in our client’s name and the second property is in joint names. As such, if a nomination is made, she would only get a 50% main residence exemption for the first property from the period when the second one was acquired.
The full main residence exemption would be available on the second property going forward.
Weighing it all up, our advice to the client was that as the First Property was rented for a short period before sale and if the gain made is large, it may be best to consider both herself and her partner choosing this to be their main residence so it can be sold CGT free.