Q&A – Partial main residence CGT exemption

Find out what your peers are asking – based on real-life questions submitted to TechConnect.

By Stuart Sheary, Senior Technical Manager

How is a partial main residence CGT exemption applied upon sale?

Q: We have a client who is looking to sell a property in the following scenario:

– Purchased home for $400,000 on 1 March 2003
– Lived in the home from 1 March 2003 until 1 January 2010
– Rented out home from 2 January 2010 until 1 September 2020
– Market value of home at 2 January 2010 was $650,000
– Moved in on 2 September 2020 and until sold (settled) on 1 March 2021 for $950,000

Assuming the client will continue to treat the property as their main residence for 6 years allowed under absence choice – income producing, will there be any assessable capital gain?

A: As your client did not reside in the house for the full period of ownership, there will be an assessable capital gain as the home cannot be treated as their main residence.

Under s118-192 special rule for first use to produce income your client is taken to have acquired the dwelling at its market value at the time it was first used to produce income1. In this case it first became income producing on 2 January 2010 and it had a market value of $650,000 at that time.

Under the s118-145 the client can continue to treat the property as their main residence for up to six years. Meaning the client can continue to treat the property as their main residence up to and including 1 January 2016.

Under s118-185 a partial main residence exemption is available which is reduced to reflect the number of days the home was not treated as their main residence. Under the partial main residence exemption, the capital gain is calculated as

capital gain

Again, under the special rule for first use to produce income the acquisition date is 2 January 2010 being the time the property first became income producing. The total days of ownership is 4,077. This is the number of days between 2 January 2010 and 1 March 2021. The sale price is $950,000 and the cost base is $650,000 meaning the capital gain before the partial exemption is $300,000.

The number of non-main residence days is 1,705. This is the accrual of non-main residence days beginning on 2 January 2016 (period extending beyond six year absence rule under s 118-145) and ends on 2 September 2020 when the client returned to live in the home.

Applying these numbers to the formula as follows:

capital gain 2

housing income graph

In this scenario, after applying the 12-month CGT exemption the client will have an assessable capital gain of $62,777.

1 It is also a requirement that the dwelling first became income producing after 20 August 1996 and would have been entitled to the full main residence exemption if sold just prior to becoming income producing.

More information

If you have any questions, or would like more information, please contact the IOOF TechConnect team on 1300 650 414.

Disclaimer
The information in this section of the website is intended for financial advisers only and is not to be distributed to clients. It has been prepared on behalf of Australian Executor Trustees Limited ABN 84 007 869 794 AFSL 240023, IOOF Investment Management Limited ABN 53 006 695 021 AFSL 230524, IOOF Investment Services Ltd ABN 80 007 350 405, AFSL 230703 and IOOF Ltd ABN 21 087 649 625 AFSL 230522 based on information that is believed to be accurate and reliable at the time of publication.