Investors Ask: Capital gains tax
Q. I have owned an apartment for 15 years. I lived in it for six years then rented it out ever since. I have recently divorced from my wife who now has sole ownership of our previous PPOR. I am now looking to sell my investment property to fund a new home. What will my CGT obligations be? If I move back in to the property for a period will that reduce my tax?
A. The general rule is that a dwelling is exempt from capital gains tax (CGT) where it is occupied as a main residence (MR) from the date of purchase and continues so until sold.
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A property continues to maintain its exemption from MR CGT? while being rented out – for an additional six years - if no other property is nominated as a MR. This is particularly helpful for people who have to travel or are relocated for work purposes.
However where another (owned) property is nominated as a MR such as a matrimonial home, CG will accrue on the rental property from the date it was first available for rental.
CG is generally calculated as the difference between net sale price and purchase price. In a situation where the property was a MR for a period of time, the cost base is taken to be the market value at the time the property was first rented out. This preserves the exempt status of the capital growth up to the point of rental. (Market value can be obtained from either a registered valuer or an estate agent.)
If the property is reoccupied as a MR, a CG tax liability may arise on sale. However the CG will now be apportioned between the period of rental and second time occupation as MR.
In deciding whether or not to reoccupy the property as a means to reduce the ultimate CG tax liability, consideration must be given to the additional growth the property will acquire during the second MR occupation period.
Shukri Barbara, principal adviser, Property Tax Specialists
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