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What Happens with CGT if I can’t move into my new home straight away

 

Earlier this week I had a question from a client who had purchased a new home.  With the property becoming their main residence they were aware that Capital Gains Tax (CGT) would not apply to a future sale as long the property was their residence for the full period of ownership.  However in this case they couldn’t move into the property straight away as there was an existing rental agreement in place.

Although the delay in moving was only for a short time, they enquired about the CGT consequences of the situation.

In general a dwelling becomes a taxpayers main residence once a tax payer has moved into it.  Where there is a gap between purchase and moving in you need to ascertain when it was first ‘practicable’ for the owner to move in.  Unfortunately having tenants already in place or renting out the property before moving in will in most circumstances mean that a portion of the property will become subject to CGT on sale.  In this circumstance it is likely that the client will only get a partial exemption on CGT when they come to sell the property unless they can convince the ATO that it was not practicable for them to move in at purchase.

If you are changing main residences, you can treat two properties as your main residence for up to six months.  However the residence you are leaving needs to have been your main residence for a continuous 3 months in the 12 months before it was disposed of and not used for income producing purposes for any of that 12 month period.  You can also continue to treat a residence as your main residence for up to 6 years so long as during that time you don’t treat any other dwelling as your main residence.  This is commonly referred to as ‘the six year rule’, and can be advantageous is many circumstances.

It is important to maintain evidence that you have actually moved into the property as well.  Things like changing your electoral roll address, connecting utilities and updating drivers licence details are all items that the ATO will look at if they make enquiries.

In this client’s circumstances it is probable that they will have to pay a portion of CGT when they come to sell the property at some time in the future.  The length of time they own the property and continue to treat it as their main residence will reduce the portion of CGT they will most likely end up paying.  Whilst at the end of the day the actual tax may be minimal it is important that the client was aware of the possible future impacts of renting the property prior to moving in.

The Money Edge | Bundaberg

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